Derivative Financial Instruments

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.

Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, Derivatives and Hedging, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects.

A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets at September 28, 2013 and December 29, 2012 follows (in millions):



	Balance Sheet Classification	2013		2012		Balance Sheet Classification	2013		2012
Derivatives designated as hedging instruments:
Interest Rate Contracts Fair Value	Other current assets	$	20.3	$	18.5	Accrued expenses	$	1.9	$	3.3
	LT other assets	—		6.4		LT other liabilities	120.7		4.6
Foreign Exchange Contracts Cash Flow	Other current assets	1.6		—		Accrued expenses	1.4		2.6
	LT other assets	0.2		—		LT other liabilities	0.4		—
Net Investment Hedge	Other current assets	1.9		0.2		Accrued expenses	29.5		25.7
		$	24.0	$	25.1		$	153.9	$	36.2
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	51.6	$	73.9	Accrued expenses	$	14.4	$	46.4
	LT other assets	—		—		LT other liabilities	5.5		8.9
		$	51.6	$	73.9		$	19.9	$	55.3

The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.

During the nine months ended September 28, 2013 and September 29, 2012, respectively, cash flows related to derivatives including those that are separately discussed in Cash Flow Hedges, Fair Value Hedges and Net Investment Hedges below resulted in net cash received of $16.7 million and net cash paid of $29.1 million respectively.

CASH FLOW HEDGES

There was an $82.6 million and $93.5 million after-tax mark-to-market loss as of September 28, 2013 and December 29, 2012, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $11.7 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.

The tables below detail pre-tax amounts reclassified from Accumulated other comprehensive loss into earnings for active derivative financial instruments during the periods in which the underlying hedged transactions affected earnings for the nine months ended September 28, 2013 and September 29, 2012 (in millions):



Year-to-date 2013 (In millions)	Gain (Loss) Recorded in OCI		Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)			Gain (Loss) Recognized in Income (Ineffective Portion*)
Foreign Exchange Contracts	$	1.7	Cost of sales	$	(3.0	)	$	—



Year-to-date 2012 (In millions)	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	(9.8	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	(11.0	)	Cost of sales	$	2.2	—

* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.

For the three and nine months ended September 28, 2013, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a gain of $0.1 million and $3.0 million, respectively, in Cost of sales, which is offsetting the loss shown above. For the three and nine months ended September 29, 2012, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a loss of $1.2 million and $2.2 million, respectively, in Cost of sales. There was no impact related to the interest rate contracts’ hedged items and the impact of de-designated hedges was immaterial for all periods presented.

For the three and nine months ended September 28, 2013, an after-tax loss of $2.4 million and $9.0 million respectively, were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings. For the three and nine months ended September 29, 2012, an after-tax loss of $0.1 million and $0.9 million respectively, were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings.

Interest Rate Contracts: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-rate debt proportions. At September 28, 2013, and December 29, 2012, all interest rate swaps designated as cash flow hedges had been terminated.

In December 2009, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400 million fixing 10 years of interest payments at 4.78%. The objective of the hedge was to offset the expected variability on future payments associated with the interest rate on debt instruments. In January 2012, contracts with a total notional amount of $240 million of these contracts were terminated. The terminations resulted in cash payments of $56.4 million, which was recorded in Accumulated other comprehensive loss and will be amortized to earnings over future periods. The cash flows stemming from the termination of such interest rate swaps designated as cash flow hedges are presented within financing activities in the Consolidated Statement of Cash Flows.

Foreign Currency Contracts

Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with non-U.S. dollar functional currencies which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases of inventory. Gains and losses reclassified from Accumulated other comprehensive loss for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in Cost of sales. Gains and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive income (loss), but are recorded directly to the Consolidated Statements of Operations and Comprehensive Income in Other-net. At September 28, 2013, the notional value of forward currency contracts outstanding was $146.1 million, all of which was designated, and maturing on various dates through 2014. At December 29, 2012, the notional value of forward currency contracts outstanding was $154.0 million, all of which was designated, maturing on various dates in 2013.

Purchased Option Contracts: The Company and its subsidiaries have entered into various inter-company transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its inter-company obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive income (loss) for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in Cost of sales. At September 28, 2013, the notional value of purchased option contracts was $102.0 million maturing on various dates through 2014. As of December 29, 2012, the notional value of purchased option contracts was $173.0 million, maturing on various dates in 2013.

FAIR VALUE HEDGES

Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In October 2012, the Company entered into interest rate swaps with notional values which equaled the Company's $400 million 3.40% notes due in 2021 and the Company's $400 million 5.20% notes due in 2040. In January 2012, the Company entered into interest rate swaps with notional values which equaled the Company's $150 million 7.05% notes due in 2028. These interest rate swaps effectively converted the Company's fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates.

In January 2012, the Company terminated interest rate swaps with notional values equal to the Company’s $300 million 4.75% notes due in 2014, $300 million 5.75% notes due in 2016, $200 million 4.90% notes due in 2012 and $250 million 6.15% notes due in 2013. These terminations resulted in cash receipts of $35.8 million. The resulting gain of $28.0 million was deferred and will be amortized to earnings over the remaining life of the notes. In July 2012, the Company repurchased the $250 million 6.15% notes due in 2013 and $300 million 4.75% notes due 2014 and, as a result, $11.1 million of the previously deferred gain was recognized in earnings at that time.

The changes in fair value of the interest rate swaps during the period were recognized in earnings as well as the offsetting changes in fair value of the underlying notes. The notional value of open contracts was $950 million as of both September 28, 2013 and December 29, 2012. A summary of the fair value adjustments relating to these swaps is as follows (in millions):



	Third Quarter 2013					Year-to-Date 2013
Income Statement Classification	Gain/(Loss) on Swaps			Gain /(Loss) on Borrowings		Gain/(Loss) on Swaps			Gain /(Loss) on Borrowings
Interest Expense	$	(26.2	)	$	26.2	$	(118.0	)	$	118.0



	Third Quarter 2012					Year-to-Date 2012
Income Statement Classification	Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings			Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings
Interest Expense	$	0.7	$	(0.7	)	$	25.7	$	(25.7	)

In addition to the fair value adjustments in the table above, the net swap accruals for each period and amortization of the gains on terminated swaps are also reported as a reduction of interest expense and totaled $5.7 million and $17.4 million for the three and nine months ended September 28, 2013, respectively, and $16.4 million and $29.6 million for the three and nine months ended September 29, 2012, respectively. Interest expense on the underlying debt was $11.0 million and $33.5 million for the three and nine months ended September 28, 2013, respectively, and $6.0 million and $21.8 million for the three and nine months ended September 29, 2012, respectively.

NET INVESTMENT HEDGES

Foreign Exchange Contracts: The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive income loss were losses of $60.2 million and $63.3 million at September 28, 2013 and December 29, 2012, respectively. As of September 28, 2013, the Company had foreign exchange contracts maturing on various dates through July 2014 with notional values totaling $966.0 million outstanding hedging a portion of its pound sterling denominated net investment. As of December 29, 2012, the Company had foreign exchange contracts maturing on various dates through October 2013 with notional values totaling $940.6 million outstanding hedging a portion of its pound sterling denominated net investment. For the nine months ended September 28, 2013, maturing foreign exchange contracts resulted in net cash receipts of $7.0 million. For the nine months ended September 29, 2012, maturing foreign exchange contracts resulted in net cash receipts of $11.8 million. Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets.

The pre-tax gain or loss from fair value changes was as follows (in millions):



	Third Quarter 2013			Year-to-Date 2013
Income Statement Classification	Amount Recorded in OCI Gain (Loss)			Amount Recorded in OCI Gain (Loss)
Other-net	$	(48.4	)	$	5.1



	Third Quarter 2012			Year-to-Date 2012
Income Statement Classification	Amount Recorded in OCI Gain (Loss)			Amount Recorded in OCI Gain (Loss)
Other-net	$	(45.7	)	$	(52.8	)

The effective and ineffective portion (including the ineffective portion and amount excluded from effectiveness testing) recorded in the Income Statements was zero for all periods presented.

UNDESIGNATED HEDGES

Foreign Exchange Contracts: Currency swaps and foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the contracts outstanding at September 28, 2013 was $2.3 billion of forward contracts and $104.9 million in currency swaps, maturing on various dates through December 2014. The total notional amount of the contracts outstanding at December 29, 2012 was $4.3 billion of forward contracts and $105.6 million in currency swaps, maturing on various dates through December 2014. The income statement impacts related to derivatives not designated as hedging instruments for 2013 and 2012 are as follows (in millions):



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Third Quarter 2013 Amount of Gain (Loss) Recorded in Income on Derivative		Year-to-Date 2013 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other-net	$	63.2	$	3.0



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Third Quarter 2012 Amount of Gain (Loss) Recorded in Income on Derivative		Year-to-Date 2012 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other-net	$	30.3	$	30.2