Derivative financial instruments

3 Months Ended

Oct. 01, 2016

Derivative financial instruments

Derivative financial instruments

6. Derivative financial instruments

Many of the Company’s subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Company to the risks associated with fluctuations in foreign currency exchange rates. The Company reduces this risk by utilizing natural hedging (i.e., offsetting receivables and payables in the same foreign currency) as well as by creating offsetting positions through the use of derivative financial instruments, primarily forward foreign exchange contracts typically with maturities of less than sixty days (“economic hedges”). The Company continues to have exposure to foreign currency risks to the extent they are not hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “other expense, net.” Therefore, the changes in valuation of the underlying items being economically hedged are offset by the changes in fair value of the forward foreign currency exchange contracts. The fair value of forward foreign exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions “other current assets” or “accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of October 1, 2016, and July 2, 2016. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. The Company’s policy is to present derivative financial instruments with the same counterparty as either a net asset or liability when the right of offset exists.

The Company generally does not hedge its investments in its foreign operations. The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.

The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase from suppliers. The Company’s foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Canadian Dollar, Japanese Yen, Chinese Yuan, Taiwan Dollar, Australian Dollar and Mexican Peso. The Company also, to a lesser extent, has foreign operations transactions in other European, Latin American and Asian foreign currencies.

The fair values of derivative financial instruments in the Company’s consolidated balance sheets are as follows:

	October 1,		July 2,
	2016		2016
	(Thousands)
Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in:
Other current assets	$	2,999	$	9,681
Accrued expenses		21,153		6,656

Included in accrued expenses as of October 1, 2016 is approximately $16.0 million of foreign currency derivative financial instruments that economically hedge the British Pound purchase price of the PF acquisition discussed in Note 2.

The amounts recorded to other expense, net related to derivative financial instruments are as follows:

	Three Months Ended
	October 1,		October 3,
	2016		2015
	(Thousands)
Net derivative financial instrument gain (loss)	$	(8,646)	$	18,769

Included in other expenses in the first quarter of fiscal 2017 is approximately $8.0 million of derivative financial instrument losses associated with foreign currency derivative financial instruments purchased to economically hedge the British Pound purchase price of the PF acquisition discussed in Note 2.  Such unrealized losses are economically offset through a lower PF purchase price as a result of the weakening of the British Pound during the first quarter of fiscal 2017.

The Company’s outstanding economic hedges had average maturities of 47 days and 53 days as of October 1, 2016, and July 2, 2016, respectively. Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are substantially offset by the gains and losses on the underlying assets or liabilities being hedged.