XML 43 R11.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Derivatives and Risk Management
 6 Months Ended
Jul. 02, 2011
Derivatives and Risk Management  
Derivatives and Risk Management

6. DERIVATIVES AND RISK MANAGEMENT

The Company is exposed to certain risks relating to its ongoing business operations, which it attempts to manage by using derivative instruments. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used to settle future payments of intercompany inventory transactions denominated in U.S. dollars by non-U.S. dollar functional currency subsidiaries. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 18 months. The Company enters into foreign currency forward contracts ("forward contracts") generally for up to 65% of the forecasted purchases to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. The majority of the Company's forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company's U.S. dollar equivalent cash flows from these intercompany inventory transactions, which will affect the Company's U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain non-inventory intercompany transactions and to which the Company does not elect hedge treatment. The Company did not have any outstanding forward contracts not designated as hedging instruments at July 2, 2011 or January 1, 2011.

The Company's forward contracts purchased to hedge exchange rate risk associated with intercompany inventory transactions meet the criteria for hedge eligibility, which requires that they represent foreign-currency-denominated forecasted intra-entity transactions in which (1) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (2) the hedged transaction is denominated in a currency other than the hedging unit's functional currency. At the inception of the hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e. amounts, currencies and settlement dates) of the forward currency exchange contract match the terms of the forecasted transaction, the Company concludes that there is no hedge ineffectiveness. The Company's cash flow hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income for all reporting periods.

The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur. For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company's hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the Second Quarter, Prior Year Quarter, Year To Date Period and the Prior Year YTD Period.

 

All derivative instruments are recognized as either assets or liabilities at fair value in the statement of financial position. Forward contracts designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the balance sheet until such forward contract gains (losses) become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivatives gains or losses that are deferred in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges as of July 2, 2011 or July 3, 2010. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all cash flow hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement. As of July 2, 2011, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions (in thousands):

 

Functional Currency

           Contract Currency  

Type

    Amount          

Type

    Amount  
European Euro      123,958          U.S. Dollar                                   168,257   
British Pound      14,629          U.S. Dollar      23,496   
Japanese Yen      3,679,200          U.S. Dollar      43,159   
Mexican Peso      32,403          U.S. Dollar      2,660   
Australian Dollar      15,300          U.S. Dollar      13,420   
Canadian Dollar      15,727          U.S. Dollar      15,699   

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (loss), net of taxes, during the Second Quarter and the Prior Year Quarter, Year To Date Period and the Prior Year YTD Period is set forth below (in thousands):

 

Derivatives Designated as Cash

Flow Hedges Under ASC 815

    For the 13 Weeks Ended
July 2, 2011		     For the 13 Weeks Ended
July 3, 2010		  

Foreign exchange contracts

    $ (6,036 )    $ 6,727   
  

 

 

    

 

 

  

Total (loss) gain recognized in other comprehensive income (loss), net of taxes

    $ (6,036 )    $ 6,727   
  

 

 

    

 

 

  

Derivatives Designated as Cash

Flow Hedges Under ASC 815

   

For the 26 Weeks Ended
July 2, 2011

    

For the 26 Weeks Ended
July 3, 2010

  

Foreign exchange contracts

    $ (13,129 )    $ 12,635   
  

 

 

    

 

 

  

Total (loss) gain recognized in other comprehensive income (loss), net of taxes

    $ (13,129 )    $ 12,635   
  

 

 

    

 

 

  

 

The following tables illustrate the effective portion of gains and losses on derivative instruments designated and qualifying as cash flow hedges recorded in accumulated other comprehensive income (loss) during the term of the hedging relationship and reclassified into earnings in the periods presented (in thousands). There were no gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the Second Quarter, Prior Year Quarter, Year To Date Period, and Prior Year YTD Period.

 

Foreign Exchange Contracts

Under ASC 815

   

Condensed
Consolidated

Income

Statements

Location

         For the 13  Weeks
Ended
July 2, 2011		     For the 13  Weeks
Ended
July 3, 2010		  

Cash flow hedging instruments

    Other income - net   

Total (loss) gain reclassified from other comprehensive income (loss), net of taxes into income, net of taxes

    $ (4,013 )    $ 2,866   
        

 

 

    

 

 

  
     

Total

    $ (4,013 )    $ 2,866   
        

 

 

    

 

 

  

Foreign Exchange Contracts

Under ASC 815

   

Condensed
Consolidated

Income Statements

Location

         For the 26 Weeks
Ended
July 2, 2011		     For the 26 Weeks
Ended
July 3, 2010		  

Cash flow hedging instruments

    Other income - net   

Total (loss) gain reclassified from other comprehensive income (loss), net of taxes into income, net of taxes

    $ (6,259 )    $ 3,178   
        

 

 

    

 

 

  
     

Total

    $ (6,259 )    $ 3,178   
        

 

 

    

 

 

  

The following table discloses the Company's fair value amounts as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line item(s) in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):

 

    

Asset Derivatives

     

Liability Derivatives

  
    

July 2, 2011

     

January 1, 2011

     

July 2, 2011

     

January 1, 2011

  

Foreign Exchange Contracts
Under ASC 815

   

Condensed
Consolidated
Balance
    Sheets Location    

    Fair
Value		     

Condensed
Consolidated
Balance
    Sheets Location    

    Fair
Value		     

Condensed
Consolidated
Balance
    Sheets Location    

    Fair
Value		     

Condensed
Consolidated
Balance
    Sheets Location    

    Fair
Value		  

Cash flow hedging instruments

   

Prepaid expenses and other current assets

    $ 52      

Prepaid expenses and other current assets

    $ 1,388      

Accrued expenses-other

    $ 15,596      

Accrued expenses-other

    $ 8,583   

Cash flow hedging instruments

   

Intangible and other assets - net

      33      

Intangible and other assets - net

      240      

Other long-term liabilities

      879      

Other long-term liabilities

      1,639   
     

 

 

        

 

 

        

 

 

        

 

 

  

Total

       $ 85          $ 1,628          $ 16,475          $ 10,222   
     

 

 

        

 

 

        

 

 

        

 

 

  

At the end of the Second Quarter, the Company had foreign exchange contracts with maturities extending through June 2013. The estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next twelve months is a loss of $13.0 million.