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DERIVATIVES AND RISK MANAGEMENT
 6 Months Ended
Jun. 30, 2012
DERIVATIVES AND RISK MANAGEMENT

8. 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 by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. 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 exchange 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 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 forward contracts that the Company purchased to hedge exchange rate risk meet the criteria for hedge eligibility, which requires that they represent foreign-currency-denominated forecasted intra-entity transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) 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 the hedge is effective.

 

The effective portion of the gain or loss on the derivative instruments is reported as a component of other comprehensive (loss) income, 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 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 or Prior Year YTD Period.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. 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’s gains (losses) become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s 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’s 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 in the Second Quarter or Prior Year Quarter. 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 June 30, 2012, 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  

Euro

      149,025       U.S. Dollar      198,179   

British Pound

      16,600       U.S. Dollar      26,219   

Japanese Yen

      2,297,700       U.S. Dollar      28,512   

Mexican Peso

      159,663       U.S. Dollar      11,750   

Australian Dollar

      10,150       U.S. Dollar      10,197   

Canadian Dollar

      20,070       U.S. Dollar      19,908   

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive (loss) income, 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
June 30, 2012		     For the 13 Weeks Ended
July 2, 2011		  

Foreign exchange forward contracts

   $ 3,708      $ (6,036 ) 
 

 

 

    

 

 

  

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

   $ 3,708      $ (6,036 ) 
 

 

 

    

 

 

  

 

Derivatives Designated as Cash

Flow Hedges Under ASC 815

    For the 26 Weeks Ended
June 30, 2012		      For the 26 Weeks Ended
July 2, 2011		  

Foreign exchange forward contracts

    $ 3,211       $ (13,129 ) 
  

 

 

     

 

 

  

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

    $ 3,211       $ (13,129 ) 
  

 

 

     

 

 

  

 

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive (loss) income, net of taxes during the term of the hedging relationship and reclassified into earnings during the Second Quarter, Prior Year Quarter, Year To Date Period, and Prior Year YTD Period (in thousands):

 

Foreign Exchange Forward

Contracts Under ASC 815

   

Condensed
Consolidated
Statements of
Comprehensive
Income
Location

         For the 13 Weeks Ended
June 30, 2012		      For the 13 Weeks Ended
July 2, 2011		  

Cash flow hedging instruments

   

Other income (expense) -net

   

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

      
         $ 1,451       $ (4,013 ) 
        

 

 

     

 

 

  

 

Foreign Exchange Forward

Contracts Under ASC 815

   

Condensed
Consolidated
Statements of
Comprehensive
Income Location

         For the 26 Weeks Ended
June 30, 2012		      For the 26 Weeks Ended
July 2, 2011		  

Cash flow hedging instruments

    Other income (expense) - net   

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

      
         $ 2,303       $ (6,259 ) 
        

 

 

     

 

 

  

The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items 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

  
    

June 30, 2012

     

December 31, 2011

     

June 30, 2012

     

December 31, 2011

  

Foreign exchange
contracts under
ASC 815

   

Condensed
Consolidated Balance
Sheet Location

    Fair
Value		     

Consolidated
Balance Sheet
Location

    Fair
Value		     

Condensed
Consolidated Balance
Sheet Location

    Fair
Value		     

Consolidated

Balance Sheet
Location

    Fair
Value		  

Cash flow hedging instruments

   

Prepaid expenses and other current assets

    $ 9,571      

Prepaid expenses and other current assets

    $ 9,719      

Accrued expenses- other

    $ 1,235      

Accrued expenses- other

    $ 3,204   

Cash flow hedging instruments

   

Intangible and other assets-net

      790      

Intangible and other assets-net

      895      

Other long-term liabilities

      129      

Other long-term liabilities

      382   
     

 

 

        

 

 

        

 

 

        

 

 

  

Total

       $ 10,361          $ 10,614          $ 1,364          $ 3,586   
     

 

 

        

 

 

        

 

 

        

 

 

  

At the end of the Second Quarter, the Company had foreign exchange forward contracts with maturities extending through January 2014. The estimated net amount of the existing gains or losses at June 30, 2012 that is expected to be reclassified into earnings within the next twelve months is a gain of $5.4 million. See Note 1—Financial Statement Policies for additional disclosures on foreign currency hedging instruments.