Financial Instruments

6 Months Ended

Jul. 02, 2011

Financial Instruments [Abstract]

Financial Instruments

NOTE I - Financial Instruments

The Company is exposed to market risks arising from adverse changes in foreign exchange and interest rates.  In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivatives.  Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings.  Gains or losses from derivatives used to manage foreign exchange are classified as selling, general and administrative expenses.

For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within shareholders' equity until the underlying hedged item is recognized in net income.  For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item.  Hedging transactions are limited to an underlying exposure.  As a result, any change in the value of the derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items.  Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item.  Ineffectiveness of the Company's hedges is not material.  If the derivative instrument is terminated, the Company continues to defer the related gain or loss and include it as a component of the cost of the underlying hedged item.  Upon determination that the underlying hedged item will not be part of an actual transaction, the Company recognizes the related gain or loss in the statement of income immediately.

The Company also uses derivatives that do not qualify for hedge accounting treatment.  The Company accounts for such derivatives at market value with the resulting gains and losses reflected in the statements of income.

The Company enters into arrangements with individual counterparties that it believes are creditworthy and generally settles such arrangements on a net basis.  In addition, the Company performs a quarterly assessment of counterparty credit risk, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty.  Based on the most recent quarterly assessment of counterparty credit risk, the Company considers this risk to be low.

Foreign Exchange

The Company enters into derivatives, primarily forward foreign exchange contracts with terms of no more than one year, to manage risk associated with exposure to certain foreign currency denominated balance sheet positions, primarily intercompany accounts receivable.  Gains or losses resulting from the translation of certain foreign currency balance sheet positions are recognized in the statement of income as incurred.  Foreign currency derivatives had a total notional value of $32.5 million as of July 2, 2011 and $28.5 million as of January 1, 2011.  Gains and losses on the derivatives were generally offset by changes in U.S. dollar value of the underlying hedged items.

Interest Rates

In the third quarter of 2010, the Company entered into a forward interest rate swap agreement with an initial notional amount of $15.0 million and a term of three years.  This swap effectively fixes the interest rate on a portion of the Company's line of credit at approximately 1.2%.  The item being hedged is the first interest payment to be made on $15.0 million of principal expected to occur each month beginning March 31, 2011.  The Company measures hedge ineffectiveness using the “hypothetical” derivative method.  This swap has been designated a cash flow hedge and the effect of the mark-to-market valuation is recorded as an adjustment, net of tax, to accumulated other comprehensive loss.  From inception to July 2, 2011, the effect of the mark-to-market valuation, net of tax, was not material and was included as a component of accumulated other comprehensive loss.

Fair Value Measurements

The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

Level 1	Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2	Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3	Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The fair values of our financial assets and liabilities are categorized as follows:

(THOUSANDS OF DOLLARS)	JULY 2, 2011				JANUARY 1, 2011
	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL
Assets:
Money market funds (A)	$2,103	$-	$-	$2,103	$7,003	$-	$-	$7,003
Short-term investments (B)	604	-	-	604	2,514	-	-	2,514
	$2,707	$-	$-	$2,707	$9,517	$-	$-	$9,517
(THOUSANDS OF DOLLARS)	JULY 2, 2011				JANUARY 1, 2011
	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL
Liabilities
Derivatives designated as
hedging instruments:
Interest rate swaps (C)	$-	$173	$-	$173	$-	$184	$-	$184
Derivatives not designated as
hedging instruments:
Foreign exchange contracts (D)	-	221	-	221	-	154	-	154
	$-	$394	$-	$394	$-	$338	$-	$338

(A)	Value is based on quoted market prices of identical instruments, fair value is included in cash and cash equivalents
(B)	Value is based on quoted market prices of identical instruments
(C)	Value is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, fair value is included in accounts payable, accrued expenses and other liabilities
(D)	Value is based on the present value of the forward rates less the contract rate multiplied by the notional amount, fair value is included in other current assets or accounts payable, accrued expenses and other liabilities

Accounts receivable are recorded at net realizable value, which approximates fair value.  Accounts payable, included in accounts payable, accrued expenses and other current liabilities, are recorded at historical cost, which approximates fair value due to the short-term nature of the liabilities.  Long-term debt is recorded at historical cost, which approximates fair value due to the variable interest rate.

The effective portion of the pre-tax gains (losses) on our derivative instruments for the three and six month periods ended July 2, 2011 and July 3, 2010 are categorized in the following table:

(THOUSANDS OF DOLLARS)	THREE MONTHS ENDED		SIX MONTHS ENDED
	JULY 2, 2011	JULY 3, 2010	JULY 2, 2011	JULY 3, 2010
Fair Value / Non-designated Hedges:
Foreign exchange contracts (A)	$208	$264	$(221)	$304
Cash Flow Hedges:
Effective portion recognized in other
comprehensive income:
Interest rate swaps	$(86)	$247	$175	$438
Effective portion reclassified from other
comprehensive income:
Interest rate swaps (B)	$(37)	$(127)	$(164)	$(255)

(A)	Included in selling, general and administrative expenses
(B)	Included in interest expense