Derivative Instruments and Hedging Activities

9 Months Ended

Jul. 02, 2011

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 July 2, 2011, the Company does not have any foreign exchange contracts with credit-risk related contingent features.

The Company's currency exchange 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 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 July 2, 2011 and October 2, 2010 Consolidated Balance Sheet as follows:

	July 2, 2011
	Prepaid Expenses
	and Other		Other Accrued
	Current Assets		Liabilities
Designated hedge derivatives:	(expressed in thousands)
Foreign exchange cash flow hedges	$	46	$	1,295
Interest rate swaps		-		832
Total designated hedge derivatives		46		2,127
Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		-		3
Total hedge and other derivatives	$	46	$	2,130

	October 2, 2010
	Prepaid Expenses
	and Other		Other Accrued
	Current Assets		Liabilities
Designated hedge derivatives:	(expressed in thousands)
Foreign exchange cash flow hedges	$	126	$	547
Interest rate swaps		-		1,406
Total designated hedge derivatives		126		1,953
Derivatives not designated as hedges:
Foreign exchange balance sheet derivatives		-		1,023
Total hedge and other derivatives	$	126	$	2,976

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. The Company periodically 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, as that is the same line item upon which the underlying hedged transaction is reported.

At July 2, 2011 and July 3, 2010, the Company had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $34.4 million and $8.9 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 $31.6 million and $7.5 million at July 2, 2011 and July 3, 2010, respectively. At July 2, 2011 the net market value of the foreign currency exchange contracts was a net liability of $1.3 million, consisting of $1.3 million in liabilities and less than $0.1 million in assets. At July 3, 2010 the net market value of the foreign currency exchange contracts was a net asset of $0.1 million, consisting of $0.2 million in assets and $0.1 million in offsetting liabilities.

The pretax amounts recognized in AOCI on currency exchange contracts for the three and nine-month fiscal periods ended July 2, 2011 and July 3, 2010, 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						Nine Fiscal Months Ended
	July, 2			July, 3			July, 2			July, 3
	2011			2010			2011			2010
	(expressed in thousands)
Beginning unrealized net (loss) gain in AOCI	$	(635	)	$	259		$	(384	)	$	(519	)
Net loss (gain) reclassified into Revenue (effective portion)		429			(349	)		838			86
Net loss reclassified into Revenue upon the removal of a hedge designation on an underlying foreign currency transaction that was cancelled		4			-			11			-
Net (loss) gain recognized in OCI (effective portion)		(831	)		284			(1,498	)		627
Ending unrealized net (loss) gain in AOCI	$	(1,033	)	$	194		$	(1,033	)	$	194

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 and nine-month fiscal periods ended July 2, 2011 and July 3, 2010. At July 2, 2011 and July 3, 2010, the amount projected to be reclassified from AOCI into earnings in the next 12 months was a net loss of $0.7 million and a net gain of $0.2 million, respectively. The maximum remaining maturity of any forward or optional contract at July 2, 2011 and July 3, 2010 was 3.1 years and 0.6 years, respectively.

Cash Flow Hedging - Interest Rate Risks

The Company uses floating to fixed interest rate swaps and forward interest rate swaps to mitigate its exposure to future changes in interest rates related to its floating rate indebtedness. The Company has designated these interest rate swaps as cash flow hedges. As a result, changes in the fair value of the interest rate swaps are recorded in AOCI within Shareholders' Investment on the Consolidated Balance Sheets.

At July 2, 2011 and July 3, 2010 the Company had outstanding interest rate swaps with total notional amounts of $24.0 million and $40.0 million, respectively. Every month, the Company pays fixed interest on these interest rate swaps in exchange for interest received at monthly U.S. LIBOR. At July 2, 2011 and July 3, 2010, the weighted-average interest rate payable by the Company under the terms of the credit facility borrowings and outstanding interest rate swaps was 2.44% and 3.31%, respectively. At July 2, 2011 and July 3, 2010, there was a 45 basis-point and 50 basis-point differential, respectively, 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 2.89% and 3.81%, respectively. The Company is currently paying a floating interest rate on $16.0 million of its outstanding debt at U.S. LIBOR plus 45 basis points (0.65% rate in effect at July 2, 2011).

In January 2011, the Company entered into forward interest rate swaps with a total notional amount of $27.0 million effective December 2011 to pay fixed interest rates ranging from 1.02% to 1.08% in exchange for interest received at monthly U.S. LIBOR.

The following table shows the contractual maturities of the interest rate hedging relationships at July 2, 2011:

Outstanding Interest Rate Swaps:
		Notional		Reference			Basis
Start Date	End Date	Amount		Rate			Spread
		(in millions)
July 25, 2008	July 25, 2012	$	13.0		4.24	%		0.45	%
November 6, 2008	November 7, 2011		11.0		3.59	%		0.45	%
	Total	$	24.0

Forward Interest Rate Swaps:
		Notional		Reference			Basis
Start Date	End Date	Amount		Rate			Spread
		(in millions)
December 7, 2011	September 7, 2012	$	11.0		1.02	%		0.45	%
December 20, 2011	September 20, 2012		6.0		1.06	%		0.45	%
December 29, 2011	September 28, 2012		10.0		1.08	%		0.45	%
	Total	$	27.0

The total market value of interest rate swaps and forward interest rate swaps at July 2, 2011 and July 3, 2010 was a liability of $0.8 million and $1.6 million, respectively. The pretax amounts recognized in AOCI on interest rate swaps and forward interest rate swaps for the three and nine-month fiscal periods ended July 2, 2011 and July 3, 2010 are as follows:

	Three Fiscal Months Ended						Nine Fiscal Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010
	(expressed in thousands)
Beginning unrealized net loss in AOCI	$	(950	)	$	(1,622	)	$	(1,406	)	$	(1,894	)
Net loss reclassified into Interest expense (effective portion)		222			304			739			921
Net loss recognized in OCI (effective portion)		(104	)		(232	)		(165	)		(577	)
Ending unrealized net loss in AOCI	$	(832	)	$	(1,550	)	$	(832	)	$	(1,550	)

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 in the current period.

At July 2, 2011 and July 3, 2010, the Company had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $26.7 million and $36.8 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 July 2, 2011 and July 3, 2010 was $6.5 million and $0.2 million, respectively. At July 2, 2011, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of less than $0.1 million, consisting entirely of liabilities. At July 3, 2010, the net market value of the balance sheet foreign currency exchange derivative contracts was a net liability of $0.2 million, consisting entirely of liabilities.

The net losses recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts for the three and nine-month fiscal periods ended July 2, 2011 and July 3, 2010 are as follows:

	Three Fiscal Months Ended						Nine Fiscal Months Ended
	July 2,			July 3,			July 2,			July 3,
	2011			2010			2011			2010
	(expressed in thousands)
Net loss recognized in Other income (expense), net	$	(192	)	$	(241	)	$	(692	)	$	(165	)