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 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. All of the Company’s outstanding forward contracts were designated as hedging instruments as of September 28, 2013 and December 29, 2012.

The forward contracts that the Company 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 (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 each forward contract 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 contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.

The Company is also exposed to interest rate risk related to its U.S.-based term loan (“Term Loan”). To manage the interest rate risk related to this loan, the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges approximately $250 million of 1-month LIBOR-based variable rate debt obligations under the Term Loan. Under the terms of the agreement, the Company will pay a fixed interest rate of 1.288% per annum on a notional amount of $250 million to the swap counterparty, which will amortize over the remaining life of the Term Loan to coincide with the amortization of the underlying loan. The Company will receive interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.

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 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. Derivatives 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 derivative'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 recorded 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 discontinuation of cash flow hedges in the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract 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 28, 2013, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions (in millions):

Functional Currency		Contract Currency
Type	Amount	Type	Amount
Euro	175.8	U.S. Dollar	231.6
British Pound	21.7	U.S. Dollar	33.7
Canadian Dollar	31.0	U.S. Dollar	30.1
Japanese Yen	2,342.0	U.S. Dollar	25.6
Mexican Peso	166.0	U.S. Dollar	12.8
Australian Dollar	12.1	U.S. Dollar	11.4

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	For the 13 Weeks Ended			For the 13 Weeks Ended
Flow Hedges Under ASC 815	September 28, 2013			September 29, 2012
Foreign exchange forward contracts	$	(4,733	)	$	(121	)
Interest rate swap	(922		)	0
Total loss recognized in other comprehensive income	$	(5,655	)	$	(121	)

	For the 39 Weeks			For the 39 Weeks
Derivatives Designated as Cash	Ended			Ended
Flow Hedges Under ASC 815	September 28, 2013			September 29, 2012
Foreign exchange forward contracts	$	1,055		$	3,090
Interest rate swap	(922		)	0
Total gain recognized in other comprehensive income	$	133		$	3,090

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, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the Third Quarter, Prior Year Quarter, Year To Date Period, and Prior Year YTD Period (in thousands):

	Condensed
	Consolidated
	Statements of Comprehensive		For the 13 Weeks			For the 13 Weeks
Derivative Contracts Under	Income		Ended			Ended
ASC 815	Location		September 28, 2013			September 29, 2012
Foreign exchange contracts designated as cash flow hedging instruments	Other income-net	Total gain reclassified from other comprehensive income	$	326		$	1,862

Foreign exchange contracts not designated as hedging instruments	Other income-net	Total gain (loss) recognized in income	$	0		$	0
Interest rate swap designated as cash flow hedging instruments	Interest expense	Total loss reclassified from other comprehensive income	$	(290	)	$	0

	Condensed
	Consolidated
	Statements of		For the 39 Weeks			For the 39 Weeks
Derivative Contracts Under	Comprehensive		Ended September 28,			Ended September 29,
ASC 815	Income Location		2013			2012
Foreign exchange contracts designated as cash flow hedging instruments	Other income-net	Total gain reclassified from other comprehensive income	$	1,124		$	4,165

Foreign exchange contracts not designated as hedging instruments	Other income-net	Total (loss) recognized in income	$	(74	)	$	0

Interest rate swap designated as cash flow hedging instruments	Interest expense	Total loss reclassified from other comprehensive income	$	(290	)	$	0

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 28, 2013

December 29, 2012

September 28, 2013

December 29, 2012

Condensed

Consolidated

Derivative Contracts Under

Balance

Fair

Balance

Fair

Balance

Fair

Balance

Fair

ASC 815

Sheets Location

Value

Sheets Location

Value

Sheets Location

Value

Sheets Location

Value

Foreign exchange contracts designated as cash flow hedging instruments

Prepaid expenses and other current assets

2,893

Prepaid expenses and other current assets

2,336

Accrued expenses- other

6,857

Accrued expenses- other

4,560

Interest rate contracts designated as cash flow hedging instruments

Prepaid expenses and other current assets

Accrued expenses- other

219

Accrued expenses- other

Foreign exchange contracts designated as cash flow hedging instruments

Intangible and other assets- net

240

Other long-term liabilities

1,065

Other long-term liabilities

582

Interest rate contracts designated as cash flow hedging instruments

Intangible and other assets- net

Other long-term liabilities

784

Other long-term liabilities

Total

2,942

2,576

8,925

5,142

At the end of the Third Quarter, the Company had forward contracts with maturities extending through March 2015. The estimated net amount of the existing gains or losses at September 28, 2013 that is expected to be reclassified into earnings within the next twelve months is a loss of $2.7 million. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.