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 27, 2014 and December 28, 2013 follows (in millions):



	Balance Sheet Classification	2014		2013		Balance Sheet Classification	2014		2013
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	LT other assets	$	—	$	—	LT other liabilities	$	6.7	$	—
Interest Rate Contracts Fair Value	Other current assets	21.4		21.7		Accrued expenses	3.2		3.3
	LT other assets	—		—		LT other liabilities	47.4		139.3
Foreign Exchange Contracts Cash Flow	Other current assets	21.8		3.7		Accrued expenses	1.0		0.3
	LT other assets	5.4		—		LT other liabilities	0.1		—
Net Investment Hedge	Other current assets	19.6		1.4		Accrued expenses	—		52.6
	LT other assets	—		—		LT other liabilities	1.2		—
		$	68.2	$	26.8		$	59.6	$	195.5
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	13.1	$	64.9	Accrued expenses	$	36.2	$	10.4
	LT other assets	1.2		—		LT other liabilities	—		6.4
		$	14.3	$	64.9		$	36.2	$	16.8

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 27, 2014 and September 28, 2013, respectively, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash paid of $33.6 million and net cash received of $16.7 million respectively.

CASH FLOW HEDGES

As of September 27, 2014 and December 28, 2013 there was a $57.0 million and $77.3 million after-tax mark-to-market loss, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $1.1 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 27, 2014 and September 28, 2013 (in millions):



Year-to-date 2014 (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	$	(6.7	)	Interest Expense	$	—		$	—
Foreign Exchange Contracts	$	15.3		Cost of sales	$	(0.8	)	$	—



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	)	$	—

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

For the three and nine months ended September 27, 2014, the foreign exchange contracts hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a gain of $1.1 million and $0.8 million, respectively, in Cost of sales, which is offsetting the amount shown above. For the three and nine months ended September 28, 2013, the foreign exchange contracts hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a gain of $0.1 million and $3.0 million, respectively. There was no impact related to the interest rate contracts' hedged items for all periods presented.

For the three and nine months ended September 27, 2014, an after-tax loss of $2.2 million and $6.7 million respectively, was 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 28, 2013, an after-tax loss of $2.4 million and $9.0 million respectively, was 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-debt proportions. At September 27, 2014 the Company had $200 million of forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2018 as discussed below. At December 28, 2013, there were no forward starting swaps outstanding.

In May 2014, the Company executed forward starting interest rate swaps with aggregate notional amounts of $200 million and in October 2014, the Company executed forward starting interest rate swaps with aggregate notional amounts of an additional $200 million. The objective of the hedges was to offset the expected variability on future payments associated with the interest rate on debt instruments expected to be issued in 2018. Gains or losses on the swaps are recorded in Accumulated other comprehensive loss and will be subsequently reclassified into earnings as the future interest expense is recognized in earnings or as ineffectiveness occurs.

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. At September 27, 2014, the notional value of forward currency contracts outstanding was $373.7 million, maturing on various dates through 2015. At December 28, 2013, the notional value of forward currency contracts outstanding was $270.1 million, maturing on various dates in 2014.

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 27, 2014, the notional value of purchased option contracts was $247.5 million maturing on various dates through 2015. As of December 28, 2013, the notional value of purchased option contracts was $120.0 million, maturing on various dates in 2014.

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 February 2014, the Company entered into interest rate swaps on the first 5 years of the Company's $400 million 5.75% notes due 2053. In addition, the Company had existing interest rate swaps with notional values which equaled the Company's $400 million 3.40% notes due 2021, the Company's $400 million 5.20% notes due 2040 and the Company's $150 million 7.05% notes due 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 February 2014, the Company terminated $200 million of interest rate swaps hedging the Company's $400 million 5.20% notes due 2040. The terminations resulted in cash payments of $30.3 million and the resulting loss of $34.8 million was deferred and will be amortized to earnings over the remaining life of the notes.

In October 2014, the Company terminated the remaining $200 million of interest rate swaps hedging the Company's $400 million 5.20% notes due 2040. The terminations resulted in cash payments of $3.1 million and the resulting loss of $4.1 million was deferred and will be amortized to earnings over the remaining life of the notes.

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 $1.2 billion as of September 27, 2014 and $950 million as of December 28, 2013. A summary of the fair value adjustments relating to these swaps is as follows (in millions):



	Third Quarter 2014						Year-to-Date 2014
Income Statement Classification	Gain/(Loss) on Swaps*			Gain /(Loss) on Borrowings			Gain/(Loss) on Swaps			Gain /(Loss) on Borrowings
Interest Expense	$	5.7		$	(5.8	)	$	90.5		$	(90.6	)
	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

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

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 $4.9 million and $15.1 million for the three and nine months ended September 27, 2014, respectively, and $5.7 million and $17.4 million for the three and nine months ended September 28, 2013, respectively. Interest expense on the underlying debt was $14.3 million and $41.7 million for the three and nine months ended September 27, 2014, respectively, and $11.0 million and $33.5 million for the three and nine months ended September 28, 2013, 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 loss were losses of $74.6 million and $76.8 million at September 27, 2014 and December 28, 2013, respectively. As of September 27, 2014, the Company had foreign exchange contracts maturing on various dates through October 2015 with notional values totaling $1.4 billion outstanding hedging a portion of its pound sterling denominated net investment. As of December 28, 2013, the Company had foreign exchange contracts maturing on various dates through October 2014 with notional values totaling $979.0 million outstanding hedging a portion of its pound sterling denominated net investment. For the nine months ended September 27, 2014 and September 28, 2013, maturing foreign exchange contracts resulted in net cash paid of $65.0 million and net cash receipts of $7.0 million, respectively. 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 recorded in Accumulated other comprehensive loss was as follows (in millions):



	Third Quarter 2014			Year-to-Date 2014
Income Statement Classification	Gain (Loss)			Gain (Loss)
Other-net	$	39.4		$	3.5

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

*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 forward contracts outstanding at September 27, 2014 was $2.4 billion, maturing on various dates through October 2015. As of September 27, 2014, there were no currency swaps outstanding as the Company terminated its currency swap in July 2014, resulting in a cash payment of $0.5 million. The total notional amount of the contracts outstanding at December 28, 2013 was $2.2 billion of forward contracts and a $107.7 million currency swap, maturing on various dates through 2014. The gain (loss) recorded in income related to derivatives not designated as hedging instruments are as follows (in millions):



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Third Quarter 2014			Year-to-Date 2014
Foreign Exchange Contracts	Other-net	$	(36.4	)	$	(10.1	)

Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Third Quarter 2013			Year-to-Date 2013
Foreign Exchange Contracts	Other-net	$	63.2		$	3.0