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DERIVATIVES AND RISK MANAGEMENT
 9 Months Ended
Sep. 29, 2012
DERIVATIVES AND RISK MANAGEMENT  
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 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 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 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 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 Third 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 Third 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 September 29, 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

 

156,025

 

U.S. Dollar

 

203,933

 

British Pound

 

17,510

 

U.S. Dollar

 

27,658

 

Japanese Yen

 

2,056,700

 

U.S. Dollar

 

25,923

 

Mexican Peso

 

133,680

 

U.S. Dollar

 

9,850

 

Australian Dollar

 

10,680

 

U.S. Dollar

 

10,847

 

Canadian Dollar

 

22,310

 

U.S. Dollar

 

22,107

 

 

As of September 29, 2012, the Company had the following outstanding forward contracts not designated as hedging instruments (in thousands):

 

Functional Currency

 

Contract Currency

 

Type

 

Amount

 

Type

 

Amount

 

Euro

 

30,000

 

U.S. Dollar

 

39,338

 

 

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (loss), net of taxes during the Third Quarter, 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
September 29, 2012

 

For the 13 Weeks Ended
October 1, 2011

 

Foreign exchange forward contracts

 

$

(121

)

$

8,444

 

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

 

$

(121

)

$

8,444

 

 

Derivatives Designated as Cash
Flow Hedges Under ASC 815

 

For the 39 Weeks Ended
September 29, 2012

 

For the 39 Weeks Ended
October 1, 2011

 

Foreign exchange forward contracts

 

$

3,090

 

$

(4,685

)

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

 

$

3,090

 

$

(4,685

)

 

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings during the Third 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
September 29, 2012

 

For the 13 Weeks Ended
October 1, 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

 

$

1,862

 

$

(3,541

)

 

Foreign Exchange Forward
Contracts Under ASC 815

 

Condensed
Consolidated
Statements of
Comprehensive
Income Location

 

 

 

For the 39 Weeks Ended
September 29, 2012

 

For the 39 Weeks Ended
October 1, 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

 

$

4,165

 

$

(9,800

)

 

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

 

 

 

September 29, 2012

 

December 31, 2011

 

September 29, 2012

 

December 31, 2011

 

Foreign Exchange

 

Condensed

 

 

 

Consolidated

 

 

 

Condensed

 

 

 

Consolidated

 

 

 

Contracts Under

 

Consolidated Balance

 

Fair

 

Balance Sheet

 

Fair

 

Consolidated Balance

 

Fair

 

Balance Sheet

 

Fair

 

ASC 815

 

Sheet Location

 

Value

 

Location

 

Value

 

Sheet Location

 

Value

 

Location

 

Value

 

Cash flow hedging instruments

 

Prepaid expenses and other current assets

 

$

4,924

 

Prepaid expenses and other current assets

 

$

9,719

 

Accrued expenses- other

 

$

3,571

 

Accrued expenses- other

 

$

3,204

 

Cash flow hedging instruments

 

Intangible and other assets- net

 

208

 

Intangible and other assets- net

 

895

 

Other long-term liabilities

 

769

 

Other long-term liabilities

 

382

 

Total

 

 

 

$

5,132

 

 

 

$

10,614

 

 

 

$

4,340

 

 

 

$

3,586

 

 

At the end of the Third Quarter, the Company had foreign exchange forward contracts with maturities extending through March 2014. The estimated net amount of the existing gains or losses at September 29, 2012 that is expected to be reclassified into earnings within the next twelve months is a gain of $0.8 million. See Note 1—Financial Statement Policies for additional disclosures on foreign currency hedging instruments.