Derivative Instruments and Hedging Activities

3 Months Ended

Dec. 29, 2012

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

7. Derivative Instruments and Hedging Activities

The Company’s results of operations could be materially impacted by changes in foreign currency exchange rates, as well as interest rates on its floating rate indebtedness. In an effort to manage exposure to these risks, the Company periodically enters into forward and option currency exchange contracts, interest rate swaps and forward interest rate swaps. Because the market value of these hedging contracts is derived from current market rates, they are classified as derivative financial instruments. The Company does not use derivatives for speculative or trading purposes. The derivative contracts contain credit risk to the extent that the Company’s bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality. For derivative instruments executed under master netting arrangements, the Company has the contractual right to offset fair value amounts recognized for the right to reclaim cash collateral with obligations to return cash collateral. The Company does not offset fair value amounts recognized on these derivative instruments. As of December 29, 2012, the Company does not have any foreign exchange contracts with credit-risk related contingent features.

The Company’s currency exchange contracts and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments pursuant to ASC 815. The Company also has derivatives which are accounted for and reported under the guidance of ASC 830-20-10. Regardless of the designation for accounting purposes, the Company believes that all of its derivative instruments are hedges of transactional risk exposures. The fair value of the Company’s outstanding designated and undesignated derivative assets and liabilities are reported in the December 29, 2012 and September 29, 2012 Consolidated Balance Sheet as follows:

	December 29, 2012
		Prepaid Expenses
		and Other		Other Accrued
		Current Assets		Liabilities
Designated hedge derivatives:		(expressed in thousands)
Foreign exchange cash flow hedges	$	1,137	$	574
Total designated hedge derivatives		1,137		574
Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		-		70
Total hedge and other derivatives	$	1,137	$	644

	September 29, 2012
		Prepaid Expenses
		and Other		Other Accrued
		Current Assets		Liabilities
Designated hedge derivatives:		(expressed in thousands)
Foreign exchange cash flow hedges	$	432	$	1,157
Total designated hedge derivatives		432		1,157
Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		-		415
Total hedge and other derivatives	$	432	$	1,572

Cash Flow Hedging – Currency Risks

Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of Accumulated Other Comprehensive Income (“AOCI”) within Shareholders’ Investment on the Consolidated Balance Sheets and reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effective portion of the cash flow hedges represents the change in fair value of the hedge that offsets the change in the functional currency value of the hedged item. Each month, the Company assesses whether its currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, the Company discontinues hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in Revenue on the Consolidated Statement of Income, because that is the same line item upon which the underlying hedged transaction is reported.

At December 29, 2012 and December 31, 2011, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $51.4 million and $35.9 million, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding were $48.1 million and $34.2 million at December 29, 2012 and December 31, 2011, respectively. At December 29, 2012 the net market value of the foreign currency exchange contracts was a net asset of $0.5 million, consisting of $1.1 million in assets and $0.6 million in liabilities. At December 31, 2011 the net market value of the foreign currency exchange contracts was a net asset of $0.4 million, consisting of $0.6 million in assets and $0.2 million in liabilities.

The pretax amounts recognized in AOCI on currency exchange contracts for the three-fiscal month periods ended December 29, 2012 and December 31, 2011, including gains (losses) reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (“OCI”), are as follows:

	Three Fiscal Months Ended
		December 29,		December 31,
		2012		2011
	(expressed in thousands)
Beginning unrealized net loss in AOCI	$	(648)	$	(365)
Net loss reclassified into Revenue (effective portion)		160		402
Net gain recognized in OCI (effective portion)		1,275		377
Ending unrealized net gain in AOCI	$	787	$	414

The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was less than $0.1 million in each of the three-fiscal month periods ended December 29, 2012 and December 31, 2011. At December 29, 2012 and December 31, 2011, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net gain of $0.7 million and a net gain of $0.1 million, respectively. The maximum remaining maturity of any forward or optional contract at December 29, 2012 and December 31, 2011 was 1.6 years and 2.6 years, respectively.

Cash Flow Hedging - Interest Rate Risks

During the three fiscal months ended December 31, 2011, the Company used floating to fixed interest rate swaps to mitigate its exposure to future changes in interest rates related to its floating rate indebtedness. The Company had designated these interest rate swap arrangements as cash flow hedges. As a result, changes in the fair value of the interest rate swaps were recorded in AOCI within Shareholders’ Investment on the Consolidated Balance Sheets throughout the entire contractual term of each of the interest rate swap arrangements. During the fiscal year ended September 29, 2012, the Company’s interest rate swap arrangements expired at various times from July 25, 2012 through September 28, 2012.

At December 31, 2011, the Company had outstanding interest rate swaps with total notional amounts of $40.0 million. During the three fiscal month period ended December 31, 2011, the Company paid fixed interest in exchange for interest received at monthly U.S. LIBOR. At December 31, 2011, the weighted-average interest rate payable by the Company under the terms of the credit facility borrowings and outstanding interest rate swaps was 2.09%. At December 31, 2011, there was a 45 basis-point differential between the variable rate interest paid by the Company on its outstanding credit facility borrowings and the variable rate interest received on the interest rate swaps. As a result of this differential, the overall effective interest rate applicable to outstanding credit facility borrowings, under the terms of the credit facility and interest rate swap agreements, was 2.54%.

The total market value of interest rate swaps at December 31, 2011 was a liability of $0.4million. The pretax amounts recognized in AOCI on interest rate swaps for the three-fiscal month period ended December 31, 2011 was as follows:

	Three Fiscal
	Months Ended
		December 31,
		2011
	(expressed in thousands)
Beginning unrealized net loss in AOCI	$	(617)
Net loss reclassified into Interest expense (effective portion)		176
Net gain recognized in OCI (effective portion)		14
Ending unrealized net loss in AOCI	$	(427)

Foreign Currency Balance Sheet Derivatives

The Company also uses foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in Other Income (Expense), net on the Consolidated Statement of Income.

At December 29, 2012 and December 31, 2011, the Company had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $16.1 million and $20.0 million, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding at December 29, 2012 and December 31, 2011 was less than $0.1 million. At December 29, 2012, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of less than $0.1 million. At December 31, 2011, the net market value of the foreign exchange balance sheet derivative contracts was a net asset of less than $0.1 million.

The net losses recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts for the three-fiscal month periods ended December 29, 2012 and December 31, 2011 are as follows:

	Three Fiscal Months Ended
		December 29,		December 31,
		2012		2011
	(expressed in thousands)
Net loss recognized in Other income (expense), net	$	(54)	$	(6)