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Derivative Financial Instruments | 9 Months Ended
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Oct. 27, 2012
Derivative Financial Instruments |
Derivative Financial Instruments |
(14) Derivative Financial Instruments Hedging Strategy The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company has entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these hedges. The Company’s objective is to hedge the variability in forecasted cash flows due to the foreign currency risk. Various transactions that occur in Canada, Europe and South Korea are denominated in U.S. dollars and British pounds and thus are exposed to earnings risk as a result of exchange rate fluctuations when converted to their functional currencies. These types of transactions include U.S. dollar denominated purchases of merchandise and U.S. dollar and British pound intercompany liabilities. In addition, certain operating expenses and tax liabilities are denominated in Swiss francs and are exposed to earnings risk as a result of exchange rate fluctuations when converted to the functional currency. The Company enters into derivative financial instruments, including forward exchange contracts, to offset some but not all of the exchange risk on certain of these anticipated foreign currency transactions. The impact of the credit risk of the counterparties to the derivative contracts is considered in determining the fair value of the foreign currency forward contracts. As of October 27, 2012, credit risk did not have a significant effect on the fair value of the Company’s foreign currency contracts. The Company also has interest rate swap agreements, which are not designated as hedges for accounting purposes, to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with the Company’s variable rate capital lease obligation, thus reducing the impact of interest rate changes on future interest payment cash flows. Refer to Note 8 for further information. Hedge Accounting Policy U.S. dollar forward contracts are used to hedge forecasted merchandise purchases over specific months. Changes in the fair value of these U.S. dollar forward contracts, designated as cash flow hedges, are recorded as a component of accumulated other comprehensive income within stockholders’ equity, and are recognized in cost of product sales in the period which approximates the time the hedged merchandise inventory is sold. The Company also hedges forecasted intercompany royalties over specific months. Changes in the fair value of these U.S. dollar forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income within stockholders’ equity, and are recognized in other income and expense in the period in which the royalty expense is incurred. The Company also has foreign currency contracts that are not designated as hedges for accounting purposes. Changes in fair value of foreign currency contracts not qualifying as cash flow hedges are reported in net earnings as part of other income and expense. Summary of Derivative Instruments The fair value of derivative instruments in the condensed consolidated balance sheet as of October 27, 2012 and January 28, 2012 was as follows (in thousands):
|  | Derivative Balance Sheet Location |  | Fair Value at Oct. 27, 2012 |  | Fair Value at Jan. 28, 2012 |
ASSETS: |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Other current assets |  | $ | 1,692 |  | $ | 3,113 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Other current assets |  | 1,613 |  | 5,202 |
Total |  |  |  | $ | 3,305 |  | $ | 8,315 |
LIABILITIES: |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Current liabilities |  | $ | 203 |  | $ | 641 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Current liabilities |  | 226 |  | 466 |
Interest rate swaps |  | Long-term liabilities |  | 920 |  | 975 |
Total derivatives not designated as hedging instruments |  |  |  | 1,146 |  | 1,441 |
Total |  |  |  | $ | 1,349 |  | $ | 2,082 |
Forward Contracts Designated as Cash Flow Hedges During the nine months ended October 27, 2012, the Company purchased U.S. dollar forward contracts in Europe and Canada totaling US$81.3 million and US$37.5 million, respectively, to hedge forecasted merchandise purchases and intercompany royalties that were designated as cash flow hedges. As of October 27, 2012, the Company had forward contracts outstanding for its European and Canadian operations of US$59.7 million and US$37.5 million, respectively, which are expected to mature over the next eight months. The following table summarizes the gains (losses) before taxes recognized on the derivative instruments designated as cash flow hedges in OCI and net earnings for the three and nine months ended October 27, 2012 and October 29, 2011 (in thousands):
|  | Gain/(Loss) Recognized in OCI |  | Location of Gain/(Loss) |  | Gain/(Loss) Reclassified from Accumulated OCI into Income |
|  | Three Months Ended Oct. 27, 2012 |  | Three Months Ended Oct. 29, 2011 |  | Reclassified from Accumulated OCI into Income (1) |  | Three Months Ended Oct. 27, 2012 |  | Three Months Ended Oct. 29, 2011 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts |  | $ | (1,876 | ) | $ | 3,970 |  | Cost of sales |  | $ | 3,697 |  | $ | (3,470 | )
Foreign exchange currency contracts |  | $ | (174 | ) | $ | 26 |  | Other income/expense |  | $ | 288 |  | $ | (20 | )
|  | Gain/(Loss) Recognized in OCI |  | Location of Gain/(Loss) |  | Gain/(Loss) Reclassified from Accumulated OCI into Income |
|  | Nine Months Ended Oct. 27, 2012 |  | Nine Months Ended Oct. 29, 2011 |  | Reclassified from Accumulated OCI into Income (1) |  | Nine Months Ended Oct. 27, 2012 |  | Nine Months Ended Oct. 29, 2011 |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts |  | $ | 4,942 |  | $ | (3,239 | ) | Cost of sales |  | $ | 6,854 |  | $ | (6,540 | )
Foreign exchange currency contracts |  | $ | 448 |  | $ | (585 | ) | Other income/expense |  | $ | 584 |  | $ | (9 | )
(1) The ineffective portion was immaterial during the three and nine months ended October 27, 2012 and October 29, 2011 and was recorded in net earnings and included in interest income/expense. As of October 27, 2012, accumulated other comprehensive income included a net unrealized gain of approximately US$2.6 million, net of tax, which will be recognized in other income or cost of product sales over the following 12 months, at the then current values on a pre-tax basis, which can be different than the current quarter-end values. The following table summarizes net after-tax derivative activity recorded in accumulated other comprehensive income (in thousands):
|  | Three Months Ended |  | Nine Months Ended |
|  | Oct. 27, 2012 |  | Oct. 29, 2011 |  | Oct. 27, 2012 |  | Oct. 29, 2011 |
Beginning balance gain (loss) |  | $ | 7,993 |  | $ | (5,619 | ) | $ | 4,259 |  | $ | (1,789 | )
Net gains (losses) from changes in cash flow hedges |  | (1,892 | ) | 3,059 |  | 4,875 |  | (3,366 | )
Net losses (gains) reclassified to income |  | (3,471 | ) | 3,027 |  | (6,504 | ) | 5,622 |
Ending balance gain (loss) |  | $ | 2,630 |  | $ | 467 |  | $ | 2,630 |  | $ | 467 |
As of January 28, 2012, the Company had forward contracts outstanding for its European and Canadian operations of US$90.0 million and US$41.5 million, respectively. Forward Contracts Not Designated as Cash Flow Hedges As of October 27, 2012, the Company had euro foreign currency contracts to purchase US$59.6 million expected to mature over the next six months, Canadian dollar foreign currency contracts to purchase US$42.5 million expected to mature over the next eight months and GBP3.1 million of foreign currency contracts to purchase euros expected to mature over the next three months. The following table summarizes the gains (losses) before taxes recognized on the derivative instruments not designated as cash flow hedges in other income and expense for the three and nine months ended October 27, 2012 and October 29, 2011 (in thousands):
|  | Location of |  | Gain/(Loss) Recognized in Income |  | Gain/(Loss) Recognized in Income |
|  | Gain/(Loss) Recognized in Income |  | Three Months Ended Oct. 27, 2012 |  | Three Months Ended Oct. 29, 2011 |  | Nine Months Ended Oct. 27, 2012 |  | Nine Months Ended Oct. 29, 2011 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Foreign exchange currency contracts |  | Other income/expense |  | $ | (3,359 | ) | $ | 6,401 |  | $ | 2,861 |  | $ | (6,005 | )
Interest rate swaps |  | Other income/expense |  | $ | 37 |  | $ | (89 | ) | $ | 42 |  | $ | (89 | )
As of January 28, 2012, the Company had euro foreign currency contracts to purchase US$88.0 million, Canadian dollar foreign currency contracts to purchase US$50.5 million, Swiss franc foreign currency contracts to purchase US$14.0 million and GBP5.0 million of foreign currency contracts to purchase euros.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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