DERIVATIVES AND FAIR VALUE MEASUREMENTS

All derivatives are recognized in the accompanying Condensed Consolidated Balance Sheets at their estimated fair value. The Company uses derivatives to manage the variability of foreign currency obligations and interest rates. The Company has cash flow hedges related to variable rate debt and forecasted foreign currency obligations, in addition to fair value hedges to manage foreign currency exposures associated with certain foreign currency denominated assets and liabilities. The Company does not enter into derivatives for speculative purposes. Changes in the fair value of the derivatives that qualify as cash flow hedges are recorded in “Accumulated other comprehensive income” in the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of the cash flows.

The Company enters into forward currency exchange contracts on a rolling basis. The Company had cash flow hedges outstanding with a notional value of $60.0 million as of December 28, 2013. These forward currency contracts fix the exchange rates for the settlement of future foreign currency obligations that have yet to be realized. The total fair value of the cash flow hedges was a $1.5 million liability as of December 28, 2013 and a $1.0 million liability as of September 28, 2013.

In addition, the Company had fair value derivatives outstanding with a notional value of $25.0 million as of December 28, 2013. The Company has not designated these derivative instruments as hedging instruments. The net settlement amount (fair value) related to these contracts is recorded on the Condensed Consolidated Balance Sheets as either a current or long-term asset or liability and as an element of other (income) expense. The total fair value of these derivatives was a $0.1 million asset as of December 28, 2013. No contracts were outstanding as of September 28, 2013.

On June 4, 2013, the Company entered into an interest rate swap contract to replace the three interest rate swap contracts that matured on April 4, 2013, as described below. The new interest rate swap contract is related to the $75.0 million term loan under the Credit Facility. This interest rate swap pays the Company variable interest at the one month LIBOR rate, and the Company pays the counterparty a fixed interest rate. The fixed interest rate for the contract is 0.875%. Based on the terms of the interest rate swap contract and the underlying debt, the interest rate contract was determined to be effective, and thus qualifies as a cash flow hedge. As such, any changes in the fair value of the interest rate swap are recorded in “Accumulated other comprehensive income” on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows. The total fair value of the interest rate swap contract was a $0.1 million asset as of December 28, 2013 and a $0.03 million asset as of September 28, 2013. The notional amount of the Company’s interest rate swap was $75.0 million as of December 28, 2013 and September 28, 2013.

The Company previously entered into three interest rate swap contracts related to the term loans under its prior credit facility that had an initial total notional value of $150 million and matured on April 4, 2013, which resulted in a $2.0 million discrete tax benefit in the three months ended June 29, 2013. The fixed interest rates for each of these contracts were 4.415%, 4.490% and 4.435%, respectively. These interest rate swap contracts were originally entered into to convert $150 million of the variable rate term loan under the prior credit facility into fixed rate debt. Based on the terms of the interest rate swap contracts and the underlying debt, these interest rate contracts were determined to be effective, and thus qualified as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps were recorded in “Accumulated other comprehensive income” on the accompanying Condensed Consolidated Balance Sheets until earnings were affected by the variability of cash flows. The total fair value of these interest rate swap contracts was a $1.7 million liability as of December 29, 2012.

The tables below present information regarding the fair values of derivative instruments (as defined in Note 1, "Basis of Presentation and Accounting Policies") and the effects of derivative instruments on the Company’s Condensed Consolidated Financial Statements:



Fair Values of Derivative Instruments
In thousands of dollars
	Asset Derivatives					Liability Derivatives
		December 28, 2013		September 28, 2013			December 28, 2013		September 28, 2013
Derivatives designated as hedging instruments	Balance Sheet Location	Fair Value		Fair Value		Balance Sheet Location	Fair Value		Fair Value
Interest rate swaps	Prepaid expenses and other	$	135	$	34	Current liabilities – other	$	—	$	—
Forward contracts	Prepaid expenses and other	$	—	$	—	Current liabilities – other	$	1,491	$	999

Fair Values of Derivative Instruments

In thousands of dollars

Asset Derivatives

Liability Derivatives

December 28, 2013

September 28, 2013

December 28, 2013

September 28, 2013

Derivatives not designated as hedging instruments

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

Forward contracts

Prepaid expenses and other

135

—

Current

liabilities – other

—



The Effect of Derivative Instruments on the Condensed Statements of Comprehensive Income
for the Three Months Ended
In thousands of dollars
Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	December 28, 2013			December 29, 2012				December 28, 2013			December 29, 2012				December 28, 2013		December 29, 2012
Interest rate swaps	$	(31	)	$	(805	)	Interest income (expense)	$	(132	)	$	(786	)	Other income (expense)	$	—	$	—
Forward contracts	$	(743	)	$	79		Selling and administrative expenses	$	(250	)	$	493		Other income (expense)	$	—	$	—
Treasury rate locks	$	—		$	—		Interest income (expense)	$	79		$	79		Other income (expense)	$	—	$	—
Income tax (benefit) expense	$	—		$	—		Income tax (benefit) expense	$	52		$	—		Income tax (benefit) expense	$	—	$	—

For the three months ended December 28, 2013, the derivative instruments that are not designated as hedging instruments resulted in the recognition of a $0.1 million gain recorded in other (income) expense on the Condensed Consolidated Statement of Comprehensive Income.

During the third quarter of fiscal 2011, when the fixed interest rate for the Company's issuance of $175 million of Notes was determined, all three related treasury rate lock contracts that were previously entered into settled and the Company received proceeds of $2.3 million, which is being amortized over the seven year term of the related debt.

The following table lists the fair values of assets/(liabilities) of the Company’s derivatives as of December 28, 2013, by input level as defined above (in thousands):



Derivatives	Level 1		Level 2			Level 3		Total
Interest rate swaps	$	—	$	135		$	—	$	135
Foreign currency forward contracts - designated as hedging instruments	$	—	$	(1,491	)	$	—	$	(1,491	)
Foreign currency forward contracts - not designated as hedging instruments	$	—	$	135		$	—	$	135

The fair value of interest rate swaps and foreign currency forward contracts is determined using a market approach which includes obtaining directly or indirectly observable values from third parties active in the relevant markets. The primary input in the fair value of the interest rate swaps is the relevant LIBOR forward curve. Inputs in the fair value of the foreign currency forward contracts include prevailing forward and spot prices for currency and interest rate forward curves.