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DERIVATIVE FINANCIAL INSTRUMENTS | 12 Months Ended
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Jun. 30, 2011
DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTS |
9. DERIVATIVE FINANCIAL INSTRUMENTS The Company's primary market risk exposures in the normal course of business are changes in interest rates and foreign currency exchange rates. The Company has established policies and procedures that govern the management of these exposures through the use of a variety of strategies, including the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation or trading. Hedging transactions are limited to an underlying exposure. The Company has established an interest rate management policy that manages the interest rate mix of its total debt portfolio and related overall cost of borrowing. The Company's foreign currency exchange rate risk management policy includes frequently monitoring market data and external factors that may influence exchange rate fluctuations in order to minimize fluctuation in earnings due to changes in exchange rates. The Company enters into arrangements with counterparties that the Company believes are creditworthy. Generally, derivative contract arrangements settle on a net basis. The Company assesses the effectiveness of its hedges on a quarterly basis using the critical terms method in accordance with guidance for accounting for derivative instruments and hedging activities. The Company has primarily utilized derivatives which are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment. For cash flow hedges and fair value hedges, changes in fair value are deferred in accumulated other comprehensive income (loss) within shareholders' equity until the underlying hedged item is recognized in earnings. Any hedge ineffectiveness is recognized immediately in current earnings. To the extent the changes offset, the hedge is effective. Any hedge ineffectiveness the Company has historically experienced has not been material. By policy, the Company designs its derivative instruments to be effective as hedges and aims to minimize fluctuations in earnings due to market risk exposures. If a derivative instrument is terminated prior to its contract date, the Company continues to defer the related gain or loss and recognizes it in current earnings over the remaining life of the related hedged item. The Company also utilizes freestanding derivative contracts which do not qualify for hedge accounting treatment. The Company marks to market such derivatives with the resulting gains and losses recorded within current earnings in the Consolidated Statement of Operations. For purposes of the Consolidated Statement of Cash Flows, cash flows associated with all derivatives (designated as hedges or freestanding economic hedges) are classified in the same category as the related cash flows subject to the hedging relationship. Cash Flow Hedges As of June 30, 2011, the Company's cash flow hedges consist of forward foreign currency contracts. In the past, the Company used interest rate swaps to maintain its variable to fixed rate debt ratio in accordance with its established policy. The Company repaid variable and fixed rate debt during the twelve months ended June 30, 2011. Prior to the repayments, the Company had two outstanding interest rate swaps totaling $40.0 million on $85.0 million aggregate variable rate debt with maturity dates in fiscal year 2012. The interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for an aggregate loss of $0.1 million. The $0.1 million loss was recorded during the fourth quarter of fiscal year 2011 on the termination of the interest rate swaps and was recorded within interest expense in the Consolidated Statement of Operations. The Company repaid variable and fixed rate debt during the twelve months ended June 30, 2010. Prior to the repayments, the Company had two outstanding interest rate swaps totaling $50.0 million on $100.0 million aggregate variable rate debt with maturity dates between fiscal years 2013 and 2015. The interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for an aggregate loss of $5.2 million. The $5.2 million loss recorded during the first quarter of fiscal year 2010 on the termination of the interest rate swaps was recorded within interest expense in the Consolidated Statement of Operations as described in Note 8 to the Consolidated Financial Statements. The Company also had two outstanding treasury lock agreements with maturity dates between fiscal years 2013 and 2015. The treasury lock agreements were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for a loss of less than $0.1 million during the twelve months ended June 30, 2010 and recorded within interest expense in the Consolidated Statement of Operations. The Company uses forward foreign currency contracts to manage foreign currency rate fluctuations associated with certain forecasted intercompany transactions. The Company's primary forward foreign currency contracts hedge approximately $0.6 million of monthly payments in Canadian dollars for intercompany transactions. The Company's forward foreign currency contracts hedge transactions through September 2012. These cash flow hedges were designed and are effective as cash flow hedges. They were recorded at fair value within other noncurrent liabilities or other current assets in the Consolidated Balance Sheet, with corresponding offsets primarily recorded in other comprehensive income (loss), net of tax. Fair Value Hedges In the past, the Company had two interest rate swaps designated as fair value hedges. The Company paid variable rates of interest and received fixed rates of interest under these contracts. The contracts and related debt matured during the twelve months ended June 30, 2009. Freestanding Derivative Forward Contracts The Company uses freestanding derivative forward contracts to offset the Company's exposure to the change in fair value of certain foreign currency denominated investments and intercompany assets and liabilities. These derivatives are not designated as hedges and therefore, changes in the fair value of these forward contracts are recognized currently in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities. In November 2009, the Company terminated its freestanding derivative contract on its remaining payments on the MY Style Note and recorded a gain of $0.7 million. The contract was settled in cash, discounted to present value. Gains and losses over the life of the contract were recognized in earnings in conjunction with marking the contract to fair value. A net loss of $0.2 million was recognized during fiscal year 2010. The Company had the following derivative instruments in its Consolidated Balance Sheet as of June 30, 2011 and 2010:
|  | Asset |  | Liability |
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|  |  |  | Fair Value |  |  |  | Fair Value |
Type |  | Classification |  | June 30, 2011 |  | June 30, 2010 |  | Classification |  | June 30, 2011 |  | June 30, 2010 |
|  |  |  | (In thousands) |  |  |  | (In thousands) |
Designated as hedging instruments—Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | — |  | $ | — |  | $ | — |  | Other noncurrent liabilities |  | $ | — |  | $ | (1,039 | )
Forward foreign currency contracts |  | Other current assets |  | $ | — |  | $ | 274 |  | Other current liabilities |  | $ | (599 | ) | $ | — |
Freestanding derivative contracts—not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward foreign currency contracts |  | Other current assets |  | $ | 212 |  | $ | — |  | Other current liabilities |  | $ | — |  | $ | (401 | )
Total |  |  |  | $ | 212 |  | $ | 274 |  |  |  | $ | (599 | ) | $ | (1,440 | )
The table below sets forth the (gain) or loss on the Company's derivative instruments recorded within accumulated other comprehensive income (AOCI) in the Consolidated Balance Sheet for the twelve months ended June 30, 2011 and 2010. The table also sets forth the (gain) or loss on the Company's derivative instruments that has been reclassified from AOCI into current earnings during the twelve months ended June 30, 2011 and 2010 within the following line items in the Consolidated Statement of Operations.
|  | (Gain) Loss Recognized in Other Comprehensive Income Twelve Months Ended June 30, |  | (Gain) Loss Reclassified from Accumulated OCI into Income (Loss) at June 30, |
--- | --- | --- | --- | --- | ---
Type |  | 2011 |  | 2010 |  | 2009 |  | Classification |  | 2011 |  | 2010 |  | 2009 |
|  | (In thousands) |  |  |  | (In thousands) |
Designated as hedging instruments—Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | (636 | ) | $ | (2,967 | ) | $ | (2,732 | ) | — |  | $ | — |  | $ | — |  | $ | — |
Forward foreign currency contracts |  |  | 456 |  |  | 519 |  |  | (495 | ) | Cost of sales |  |  | 48 |  |  | (261 | ) |  | (142 | )
Treasury lock contracts |  |  | — |  |  | (146 | ) |  | 41 |  | Interest income |  |  | — |  |  | 388 |  |  | (25 | )
Total |  | $ | (180 | ) | $ | (2,594 | ) | $ | (3,186 | ) |  |  | $ | 48 |  | $ | 127 |  | $ | (167 | )
As of June 30, 2011 the Company estimates that it will reclassify into earnings during the next twelve months a gain of $0.6 million from the pretax amount recorded in AOCI as the anticipated cash flows occur. The table below sets forth the gain or (loss) on the Company's derivative instruments for the years ended June 30, 2011 and 2010 recorded within interest income and other, net in the Consolidated Statement of Operations.
|  | Derivatives Impact on Income (Loss) at June 30, |
--- | --- | --- | ---
Type |  | Classification |  | 2011 |  | 2010 |  | 2009 |
|  |  |  | (In thousands) |
Designated as hedging instruments—Fair Value Hedges: |  |  |  |  |  |  |  |  |  |  |  |
Fair value interest rate swap |  | Interest income and other, net |  | $ | — |  | $ | — |  | $ | 335 |
Freestanding derivative contracts—not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Forward foreign currency contracts |  | Interest income and other, net |  | $ | 613 |  | $ | (811 | ) | $ | 1,147 |
Total |  |  |  | $ | 613 |  | $ | (811 | ) | $ | 1,482 |

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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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