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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Jun. 30, 2012
DERIVATIVE FINANCIAL INSTRUMENTS

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company has entered into foreign currency forward contracts and those contracts are accounted for as cash flow hedges. The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item.

The Company transacts business in Mexico and is subject to the risk of foreign currency exchange rate fluctuations. The Company enters into foreign currency forward contracts to manage the foreign currency fluctuations for Mexican peso denominated payroll, utility, tax, and accounts payable expenses. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded.

As of June 30, 2012, the Company had outstanding foreign currency forward contracts of $57.8 million. These contract maturity dates extend through March 2015. As of June 30, 2012, the net amount of existing losses expected to be reclassified into earnings within the next 12 months is $0.3 million. During the fiscal year ended June 30, 2012, the Company entered into $41.1 million of foreign currency forward contracts, which includes $5.6 million of foreign cross currency swaps which are also accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging, and settled $21.2 million of such contracts. During the fiscal year ended July 2, 2011, the Company entered into $21.7 million of foreign currency forward contracts and settled $14.6 million of such contracts. During the fiscal year ended July 3, 2010, the Company entered into $30.9 million of foreign currency forward contracts and settled $17.8 million of such contracts.

The following table summarizes the fair value of derivative instruments in the Consolidated Balance Sheets as of June 30, 2012 and July 2, 2011 (in thousands):

 

Derivatives Designated as Hedging

Instruments

   

Balance Sheet Location

    June 30, 2012
Fair Value		     July 2, 2011
Fair Value		  

Foreign currency forward contracts

    Other current assets    $ 199      $ 1,645   

Foreign currency forward contracts

    Other long term assets    $ 659      $ 1,078   

Foreign currency forward contracts

    Other current liabilities    $ (923 )   $ —     

Foreign currency forward contracts

    Other long term liabilities    $ (928 )   $ (82 ) 

The following table summarizes the gain (loss) of derivative instruments on the Consolidated Statement of Operations for the fiscal year 2012 (in thousands):

 

Derivatives Designated as Hedging Instruments

    AOCI Balance
as of
July 2, 2011		      Effective
Portion
Recorded In
AOCI		     Effective Portion
Reclassified From
AOCI Into Cost
of Sales		      AOCI Balance
as of
June 30, 2012		  

Settled foreign currency forward contracts

    $ 1,035       $ (1,119 )    $ 84       $ —     

Unsettled foreign currency forward contracts

      705         (1,364 )      —           (659 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 1,740       $ (2,483 )    $ 84       $ (659 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

 

The following table summarizes the gain (loss) of derivative instruments on the Consolidated Statement of Operations for the fiscal year 2011 (in thousands):

 

Derivatives Designated as Hedging Instruments

    AOCI Balance
as of
July 3, 2010		     Effective
Portion
Recorded In
AOCI		      Effective Portion
Reclassified From
AOCI Into
Cost of Sales		     AOCI Balance
as of
July 2, 2011		  

Settled foreign currency forward contracts

    $ 279      $ 1,253       $ (1,532 )    $ —     

Unsettled foreign currency forward contracts

      (521 )      2,261         —          1,740   
  

 

 

    

 

 

     

 

 

    

 

 

  

Total

    $ (242 )    $ 3,514       $ (1,532 )    $ 1,740   
  

 

 

    

 

 

     

 

 

    

 

 

  

The following table summarizes the gain (loss) of derivative instruments on the Consolidated Statement of Operations for the fiscal year 2010 (in thousands):

 

Derivatives Designated as Hedging Instruments

    AOCI Balance
as of
June 27, 2009		      Effective
Portion
Recorded In
AOCI		     Effective Portion
Reclassified From
AOCI Into
Cost of Sales		     AOCI Balance
as of
July 3, 2010		  

Settled foreign currency forward contracts

    $ 912       $ 912      $ (1,824 )    $ —     

Unsettled foreign currency forward contracts

      —           (242 )      —          (242 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

Total

    $ 912       $ 670      $ (1,824 )    $ (242 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

The Company does not enter into derivative instruments for trading or speculative purposes. The Company’s counterparties to the foreign currency forward contracts are major banking institutions. These institutions do not require collateral for the contracts, and the Company believes that the risk of the counterparties failing to meet their contractual obligations is remote.

As of June 30, 2012, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from its China operations. The Company does not currently manage these risk exposures by using derivative instruments.