XML 25 R11.htm IDEA: XBRL DOCUMENT v3.19.3
Derivative Instruments and Hedging Activities
 9 Months Ended
Aug. 25, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Accounting Policy
Financial Statement Presentation
The Company records all derivatives on the balance sheet at fair value, which are included in "Other current assets", "Other non-current assets", "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets. The portion of the fair value that represents cash flow occurring within one year are classified as current and the portion related to cash flows occurring beyond one year are classified as non-current. The cash flows from the designated derivative instruments used as hedges are classified in the Company's consolidated statements of cash flows in the same section as the cash flows of the hedged item.
Cash Flow Hedges
The Company's cash flow hedges are recorded in "Other comprehensive income" and are not reclassified to earnings until the related net investment position has been liquidated. As a result of ASU 2017-12, for foreign exchange forward contracts accounted for as cash flow hedges, the ineffective portion (if any) will not be separately recorded. The classification of effective hedge results on the Company's consolidated statements of income is the same as that of the underlying exposure. For foreign exchange risk cash flow hedges, forward points are excluded from the assessment of hedge effectiveness and are recognized in "Net Revenues" or "Costs of goods sold" on a straight-line basis over the life of the contract. In each accounting period, differences between the change in fair value of the forward points and the amount recognized on a straight-line basis is recognized in "Other comprehensive income".
Net Investment Hedges
The Company designates certain non-derivative instruments as net investment hedges to hedge the Company's net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. The ineffective portions of these hedges are recorded in "Other expense, net" in the Company's consolidated statements of income. The effective portions of these hedges are recorded in "Accumulated other comprehensive loss" on the Company's consolidated balance sheets and are not reclassified to earnings until the related net investment position has been liquidated.
No Hedging Designation
The Company may also enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting. For derivatives not designated for hedge accounting, changes in the fair value are recorded in "Other expense, net" in the Company’s consolidated statements of income.
The Company's foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows and selected assets or liabilities without exposing the Company to additional risk associated with transactions that could be regarded as speculative. The Company manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other.
Designated Cash Flow Hedges
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. The Company’s global sourcing organization uses the U.S. dollar as its functional currency and is primarily exposed to changes in functional currency equivalent cash flows from anticipated inventory purchases, as it procures inventory on behalf of subsidiaries with Euro functional currencies. Additionally, a European subsidiary uses Euros as its functional currency and is exposed to anticipated non-functional currency denominated sales. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, forward points are excluded from the determination of hedge effectiveness and are included in current Cost of sales for hedges of anticipated inventory purchases and in Net Revenues for hedges of anticipated sales on a straight-line basis over the life of the contract. In each accounting period, differences between the change in fair value of the forward points and the amount recognized on a straight-line basis is recognized in other comprehensive income. There was no hedge ineffectiveness for the nine months ended August 25, 2019.
Net Investment Hedges
The Company has designated a portion of its outstanding Euro-denominated senior notes as a net investment hedge to manage foreign currency exposures in its foreign operations.
Non-designated Cash Flow Hedges
The Company enters into derivative instruments not designated as hedges. These derivative instruments are not speculative and are used to manage the Company’s exposure to certain product sourcing activities, some intercompany sales, foreign subsidiaries' royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities but the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in "Other expense, net" in the Company’s consolidated statements of income.
As of August 25, 2019, the Company had forward foreign exchange contracts derivatives that were not designated as hedges in qualifying hedging relationships, of which $1.0 billion were contracts to buy and $444.1 million were contracts to sell various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2021. The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 25, 2019
 
November 25, 2018
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange risk cash flow hedges(1)
$
10,228

 
$
—

 
$
10,228

 
$
—

 
$
—

 
$
—

Foreign exchange risk cash flow hedges(2)
—

 
(358
)
 
(358
)
 
—

 
—

 
—

Total
$
10,228

 
$
(358
)
 
 
 
$
—

 
$
—

 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
21,448

 
(10,228
)
 
11,220

 
18,372

 
—

 
18,372

Forward foreign exchange contracts(2)
358

 
(7,135
)
 
(6,777
)
 
—

 
(4,447
)
 
(4,447
)
Total
$
21,806

 
$
(17,363
)
 
 
 
$
18,372

 
$
(4,447
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Euro senior notes
$
—

 
$
(526,253
)
 
 
 
$
—

 
$
(541,500
)
 
 
_____________
 
(1)
Included in "Other current assets" or "Other non-current assets" on the Company’s consolidated balance sheets.
(2)
Included in "Other accrued liabilities" or "Other long-term liabilities" on the Company’s consolidated balance sheets.
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis; however, the Company records the fair value on a gross basis on its consolidated balance sheets based on maturity dates, including those subject to master netting arrangements. The table below presents the gross and net amounts of these contracts recognized on the Company's consolidated balance sheets by type of financial instrument:
 
August 25, 2019
 
November 25, 2018
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
Gross Amounts of Assets / (Liabilities) Presented in the Balance Sheet
 
Gross Amounts Not Offset in the Balance Sheet
 
Net Amounts of Assets / (Liabilities)
 
 
 
 
 
 
(Dollars in thousands)
Foreign exchange risk contracts and forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
29,675

 
$
(4,516
)
 
$
25,159

 
$
16,417

 
$
(1,756
)
 
$
14,661

Financial liabilities
(15,958
)
 
4,516

 
(11,442
)
 
(2,181
)
 
1,756

 
(425
)
Total
 
 
 
 
$
13,717

 
 
 
 
 
$
14,236

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
2,359

 
$
—

 
$
2,359

 
$
1,955

 
$
—

 
$
1,955

Financial liabilities
(1,763
)
 
—

 
(1,763
)
 
(2,266
)
 
—

 
(2,266
)
Total
 
 
 
 
$
596

 
 
 
 
 
$
(311
)


The table below provides data about the amount of gains and losses related to derivative instruments designated as cash flow hedges and non-derivative instruments designated as net investment hedges included in "Accumulated other comprehensive loss" ("AOCI") on the Company’s consolidated balance sheets:
 
Amount of Gain (Loss)
Recognized in OCI
(Effective Portion)
 
Amount of Gain (Loss) Reclassified from AOCI into Net Income(1)
 
As of
 
As of
 
Three Months Ended
 
Nine Months Ended
August 25,
2019
November 25,
2018
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Foreign exchange risk contracts
$
8,372

 
$
—

 
$
869

 
$
—

 
$
1,586

 
$
—

Realized forward foreign exchange swaps (2)
4,637

 
4,637

 
—

 
—

 
—

 
—

Yen-denominated Eurobonds
(19,811
)
 
(19,811
)
 
—

 
—

 
—

 
—

Euro-denominated senior notes
(39,169
)
 
(54,416
)
 
—

 
—

 
—

 
—

Cumulative income taxes
24,266

 
29,703

 
—

 
—

 
—

 
—

Total
$
(21,705
)
 
$
(39,887
)
 
 
 
 
 
 
 
 

_____________
(1)    Amounts reclassified from AOCI were classified as net revenues and costs of goods sold on the consolidated statements of income.
(2)    Prior to and during 2005, the Company used foreign exchange currency swaps to hedge the net investment in its foreign operations. For hedges that qualified for hedge accounting, the net gains were included in AOCI and are not reclassified to earnings until the related net investment position has been liquidated.
Within the next 12 months, a $7.3 million gain from cash flow hedges is expected to be reclassified from AOCI into net income.
The table below presents the effects of the Company's cash flow hedges of foreign exchange risk contracts on the Consolidated Statements of Income for the three and nine months ended August 25, 2019:
 
August 25,
2019
 
Three Months Ended
 
Nine Months Ended
Amount of Gain (Loss) on Cash Flow Hedge Activity:
(Dollars in thousands)
Revenues
$
(812
)
 
$
(3,257
)
Cost of Goods Sold
$
1,681

 
$
4,843

The table below provides data about the amount of gains and losses related to derivatives instruments included in "Other expense, net" in the Company's consolidated statements of income:
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2019
 
August 26,
2018
 
August 25,
2019
 
August 26,
2018
 
(Dollars in thousands)
Realized gain (loss)
$
979

 
$
(2,298
)
 
$
8,739

 
$
(20,446
)
Unrealized gain (loss)
535

 
6,835

 
(9,102
)
 
22,607

Total
$
1,514

 
$
4,537

 
$
(363
)
 
$
2,161