Derivative Financial Instruments

6 Months Ended

Mar. 29, 2015

Derivative Financial Instruments [Abstract]

7 DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency exchange rate and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are reported at fair value in the Condensed Consolidated Statements of Financial Position (Unaudited). When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception of the hedging instrument and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is recognized in earnings in the period incurred. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also recognized in earnings in the period incurred.

Derivative Financial Instruments

Cash Flow Hedges

The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in Accumulated Other Comprehensive Income (Loss) (“AOCI”) and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to Interest expense from the underlying debt to which the swap is designated. At both March 29, 2015 and September 30, 2014, the Company had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at 1.36% for a notional principal amount of $300.0 through April 2017. The derivative net loss on these contracts recorded in AOCI by the Company at March 29, 2015 was $1.8, net of tax benefit of $0.0. At March 29, 2015, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1.3, net of tax.

The Company’s interest rate swap derivative financial instruments at March 29, 2015 and September 30, 2014 are summarized as follows:



	March 29, 2015			September 30, 2014
	Notional Amount		Remaining Years	Notional Amount		Remaining Years
Interest rate swaps - fixed	$	300.0	2.0	$	300.0	2.5

The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Mexican Pesos, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold. At March 29, 2015, the Company had a series of foreign exchange derivative contracts outstanding through June 2016 with a contract value of $215.4. The derivative net gain on these contracts recorded in AOCI by the Company at March 29, 2015 was $15.2, net of tax expense of $5.4. At March 29, 2015, the portion of derivative net gains estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $15.2, net of tax.

The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. The Company hedges a portion of the risk associated with the purchase of these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At March 29, 2015, the Company had a series of zinc swap contracts outstanding through September 2016 for 7.3 thousand metric tons with a contract value of $16.0. At March 29, 2015, the Company had a series of brass swap contracts outstanding through September 2016 for 1.9 thousand metric tons with a contract value of $9.2. The derivative net loss on these contracts recorded in AOCI by the Company at March 29, 2015 was $0.7, net of tax benefit of $0.1. At March 29, 2015, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $0.8, net of tax.

Derivative Contracts Not Designated as Hedge Accounting

The Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Canadian Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At March 29, 2015 and September 30, 2014, the Company had $174.1 and $108.9, respectively, of notional value of such foreign exchange derivative contracts outstanding.

The Company periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the hedge contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the hedges. The swaps effectively fix the floating price on a specified quantity of silver through a specified date. At March 29, 2015, the Company had a series of such swap contracts outstanding through September 2015 for 15.0 thousand troy ounces with a contract value of $0.3. At September 30, 2014, the Company had a series of such swap contracts outstanding through September 30, 2015 for 25.0 thousand troy ounces with a contract value of $0.4.

Fair Value of Derivative Instruments

The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging” (“ASC 815”).

The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:




Asset Derivatives		March 29, 2015		September 30, 2014
Derivatives designated as hedging instruments under ASC 815:
Interest rate contracts	Deferred charges and other	$	—	$	0.6
Commodity contracts	Receivables—Other		0.1		1.3
Commodity contracts	Deferred charges and other		0.1		—
Foreign exchange contracts	Receivables—Other		20.7		12.0
Foreign exchange contracts	Deferred charges and other		0.1		0.3
Total asset derivatives designated as hedging instruments under ASC 815			21.0		14.2
Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange contracts	Receivables—Other		—		0.5
Total asset derivatives		$	21.0	$	14.7

The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows:




Liability Derivatives		March 29, 2015		September 30, 2014
Derivatives designated as hedging instruments under ASC 815:
Interest rate contracts	Other current liabilities	$	1.4	$	1.3
Interest rate contracts	Accrued interest		0.4		0.4
Interest rate contracts	Other long-term liabilities		0.4		—
Commodity contracts	Accounts payable		1.0		0.2
Foreign exchange contracts	Other long-term liabilities		0.2		—
Total liability derivatives designated as hedging instruments under ASC 815		$	3.4	$	1.9
Derivatives not designated as hedging instruments under ASC 815:
Commodity contract	Accounts payable	$	—	$	0.1
Foreign exchange contracts	Accounts payable		0.9		0.1
Total liability derivatives		$	4.3	$	2.1

Changes in AOCI from Derivative Instruments

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 3, “Comprehensive Income (Loss)” for further information.

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended March 29, 2015, pretax:

Location of

Gain (Loss)

Recognized in

Amount of

Income on

Gain (Loss)

Derivatives

Recognized in

Amount of

Location of

(Ineffective

Income on

Gain (Loss)

Amount of

Portion and

Derivatives

Recognized in

Reclassified from

Gain (Loss)

Amount

(Ineffective Portion

AOCI on

AOCI into

Reclassified from

Excluded from

and Amount

Derivatives in ASC 815 Cash Flow

Derivatives

Income

AOCI into Income

Effectiveness

Excluded from

Hedging Relationships

(Effective Portion)

Testing)

Effectiveness Testing)

Interest rate contracts

(1.4)

Interest expense

(0.5)

Interest expense

—

Commodity contracts

(0.5)

Cost of goods sold

(0.1)

Cost of goods sold

—

Foreign exchange contracts

(0.1)

Net sales

—

Net sales

—

Foreign exchange contracts

11.3

Cost of goods sold

7.6

Cost of goods sold

—

Total

9.3

7.0

—

The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the six month period ended March 29, 2015, pretax:

Location of

Gain (Loss)

Recognized in

Amount of

Income on

Gain (Loss)

Derivatives

Recognized in

Amount of

Location of

(Ineffective

Income on

Gain (Loss)

Amount of

Portion and

Derivatives

Recognized in

Reclassified from

Gain (Loss)

Amount

(Ineffective Portion

AOCI on

AOCI into

Reclassified from

Excluded from

and Amount

Derivatives in ASC 815 Cash Flow

Derivatives

Income

AOCI into Income

Effectiveness

Excluded from

Hedging Relationships

(Effective Portion)

Testing)

Effectiveness Testing)

Interest rate contracts

(2.0)

Interest expense

(0.9)

Interest expense

—

Commodity contracts

(1.7)

Cost of goods sold

0.3

Cost of goods sold

—

Foreign exchange contracts

20.8

Cost of goods sold

12.4

Cost of goods sold

—

Total

17.1

11.8

—

Location of

Gain (Loss)

Recognized in

Amount of

Income on

Gain (Loss)

Derivatives

Recognized in

Amount of

Location of

(Ineffective

Income on

Gain (Loss)

Amount of

Portion and

Derivatives

Recognized in

Reclassified from

Gain (Loss)

Amount

(Ineffective Portion

AOCI on

AOCI into

Reclassified from

Excluded from

and Amount

Derivatives in ASC 815 Cash Flow

Derivatives

Income

AOCI into Income

Effectiveness

Excluded from

Hedging Relationships

(Effective Portion)

Testing)

Effectiveness Testing)

Commodity contracts

(1.0)

Cost of goods sold

0.2

Cost of goods sold

(0.2)

Foreign exchange contracts

—

Net sales

0.1

Net sales

—

Foreign exchange contracts

(0.8)

Cost of goods sold

(0.2)

Cost of goods sold

—

Total

(1.8)

0.1

(0.2)

Location of

Gain (Loss)

Recognized in

Amount of

Income on

Gain (Loss)

Derivatives

Recognized in

Amount of

Location of

(Ineffective

Income on

Gain (Loss)

Amount of

Portion and

Derivatives

Recognized in

Reclassified from

Gain (Loss)

Amount

(Ineffective Portion

AOCI on

AOCI into

Reclassified from

Excluded from

and Amount

Derivatives in ASC 815 Cash Flow

Derivatives

Income

AOCI into Income

Effectiveness

Excluded from

Hedging Relationships

(Effective Portion)

Testing)

Effectiveness Testing)

Commodity contracts

0.1

Cost of goods sold

—

Cost of goods sold

—

Foreign exchange contracts

0.1

Net sales

0.1

Net sales

—

Foreign exchange contracts

(1.1)

Cost of goods sold

(1.0)

Cost of goods sold

—

Total

(0.9)

—

Other Changes in Fair Value of Derivative Contracts

For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign currency payments, commodity purchases and interest rate payments, but are not designated as hedging instruments under ASC 815, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended March 29, 2015 and March 30, 2014, the Company recognized the following gains (losses) on these derivative contracts:


	Amount of Gain (Loss)
	Recognized in				Location of Gain (Loss)
Derivatives Not Designated as	Income on Derivatives				Recognized in
Hedging Instruments Under ASC 815	2015		2014		Income on Derivatives
Foreign exchange contracts	$	(5.7)	$	(0.1)	Other expense, net

During the six month periods ended March 29, 2015 and March 30, 2014, the Company recognized the following gains (losses) on these derivative contracts:



	Amount of Gain (Loss)
	Recognized in				Location of Gain (Loss)
Derivatives Not Designated as	Income on Derivatives				Recognized in
Hedging Instruments Under ASC 815	2015		2014		Income on Derivatives
Commodity contracts	$	—	$	(0.1)	Cost of goods sold
Foreign exchange contracts		(7.4)		0.7	Other expense, net
Total	$	(7.4)	$	0.6

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

+ References

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