Financial Instruments

6 Months Ended

Jul. 02, 2011

Financial Instruments [Abstract]

Financial Instruments

Note 11— Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments at July 2, 2011, January 1, 2011 and July 3, 2010 are as follows:

		July 2, 2011				January 1, 2011				July 3, 2010
	Balance Sheet	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Location	Amount		Value		Amount		Value		Amount		Value
Assets:
Accounts receivable	Accounts receivable, net of reserves	$	320,416	$	320,416	$	318,123	$	318,123	$	304,328	$	304,328
Open foreign currency exchange contracts	Prepaid expenses and other current assets		419		419		834		834		5,388		5,388
Interest rate cap	Other assets		14,395		14,395		—		—		—		—
Liabilities:
Accounts payable	Accounts payable	$	149,665	$	149,665	$	152,714	$	152,714	$	156,695	$	156,695
Short-term debt	Short-term debt		8,909		8,909		32,172		32,172		65,203		65,203
Open foreign currency exchange contracts	Accrued liabilities		7,465		7,465		3,282		3,282		870		870
2011 Term loan, current portion	Short-term debt		2,000		2,000		—		—		—		—
2011 Term loan	Long-term debt		198,000		198,000		—		—		—		—

See Note 17 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for Fiscal 2010 for the methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments. In addition, the 2011 Term Loan (see Note 14 of Notes to Consolidated Condensed Financial Statements) matures on June 17, 2018 and bears a variable rate of interest. The fair value of the 2011 Term Loan is based on discounted future cash flows using the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The fair value of the interest rate cap was determined using broker quotes, which use discounted cash flows and the then-applicable forward LIBOR rates.

Derivative Financial Instruments

Foreign Currency Exchange Forward Contracts

During the Six Months Ended July 2, 2011 and the Six Months Ended July 3, 2010, the Company’s Korean, European and Canadian subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed either to satisfy up to the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period or payment of 100% of certain minimum royalty and advertising expenses. In addition, during the Six Months Ended July 2, 2011, one of the Company’s Mexican subsidiaries entered into foreign exchange forward contracts, which were designed to satisfy receipt of up to the first 50% of U.S. dollar denominated inventory over a maximum 18-month period. All of the foregoing forward contracts were designated as cash flow hedges, with gains and losses accumulated on the Consolidated Condensed Balance Sheets in Other Comprehensive Income and recognized in Cost of Goods Sold in the Consolidated Condensed Statement of Operations during the periods in which the underlying transactions occur.

During the Six Months Ended July 2, 2011 and the Six Months Ended July 3, 2010, the Company also continued hedging programs, which were accounted for as economic hedges, with gains and losses recorded directly in Other loss (income) or Selling, general and administrative expense in the Consolidated Condensed Statements of Operations in the period in which they are incurred. Those hedging programs included foreign currency exchange forward contracts and zero cost collars that were designed to fix the number of Euros, Korean Won, Canadian Dollars or Mexican Pesos required to satisfy either (i) the first 50% of U.S. dollar denominated purchases of inventory over a maximum 18-month period; (ii) 50% of intercompany sales of inventory by a Euro functional currency subsidiary to a British subsidiary, whose functional currency is the Pound Sterling or (iii) U.S. dollar denominated intercompany loans and payables.

Interest Rate Cap

On July 1, 2011, the Company entered into an Interest Rate Cap Agreement (as defined below), which will limit the interest rate payable to 5.6975% with respect to the portion of the 2011 Term Loan that equals the notional amount of the interest rate cap. The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%. See Note 14 of Notes to Consolidated Condensed Financial Statements — Interest Rate Cap.

The following table summarizes the Company’s derivative instruments as of July 2, 2011, January 1, 2011 and July 3, 2010:

		Asset Derivatives							Liability Derivatives
			Fair Value							Fair Value
		Balance Sheet	July 2,		January 1,		July 3,		Balance Sheet	July 2,		January 1,		July 3,
	Type (a)	Location	2011		2011		2010		Location	2011		2011		2010
Derivatives designated as hedging instruments under FASB ASC 815-20
Foreign exchange contracts	CF	Prepaid expenses and other current assets	$	—	$	—	$	1,969	Accrued liabilities	$	3,895	$	2,290	$	—
Interest rate cap	CF	Other assets		14,395		—		—			—		—		—
			$	14,395	$	—	$	1,969		$	3,895	$	2,290	$	—
Derivatives not designated as hedging instruments under FASB ASC 815-20
Foreign exchange contracts		Prepaid expenses and other current assets	$	419	$	834	$	3,419	Accrued liabilities	$	3,570	$	992	$	870
Total derivatives			$	14,814	$	834	$	5,388		$	7,465	$	3,282	$	870
(a) CF = cash flow hedge

The following tables summarize the effect of the Company’s derivative instruments on the Consolidated Condensed Statements of Operations for the Three and Six Months Ended July 2, 2011 and the Three and Six Months Ended July 3, 2010:

							Location of Gain
							(Loss) Reclassified							Location of Gain (Loss)
Derivatives in FASB ASC		Amount of Gain (Loss)					from Accumulated	Amount of Gain (Loss) Reclassified						Recognized in Income	Amount of Gain (Loss) Recognized
815-20 Cash Flow Hedging	Nature of Hedged	Recognized in OCI on					OCI into Income	from Accumulated OCI into						on Derivative	in Income on Derivative
Relationships	Transaction	Derivatives (Effective Portion)					(Effective Portion)	Income (Effective Portion)						(Ineffective Portion) (c)	(Ineffective Portion)
		Three Months			Three Months			Three Months			Three Months				Three Months			Three Months
		Ended			Ended			Ended			Ended				Ended			Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010				July 2, 2011			July 3, 2010
Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	(311	)	$	877	cost of goods sold	$	(324	)	$	341		other loss/income	$	3		$	9
Foreign exchange contracts	Purchases of inventory (b)		(946	)		2,529	cost of goods sold		(989	)		(312	)	other loss/income		30			106
Total		$	(1,257	)	$	3,406		$	(1,313	)	$	29			$	33		$	115
		Six Months			Six Months			Six Months			Six Months				Six Months			Six Months
		Ended			Ended			Ended			Ended				Ended			Ended
		July 2, 2011			July 3, 2010			July 2, 2011			July 3, 2010				July 2, 2011			July 3, 2010
Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	(1,011	)	$	1,515	cost of goods sold	$	(661	)	$	400		other loss/income	$	(19	)	$	26
Foreign exchange contracts	Purchases of inventory (b)		(3,484	)		1,390	cost of goods sold		(1,738	)		(818	)	other loss/income		(28	)		74
Total		$	(4,495	)	$	2,905		$	(2,399	)	$	(418	)		$	(47	)	$	100

(a)	At July 2, 2011, the amount of minimum royalty costs hedged was $11,366; contracts expire through March 2012. At July 3, 2010, the amount of minimum royalty costs hedged was $9,252; contracts expire through March 2011.
(b)	At July 2, 2011, the amount of inventory purchases hedged was $55,100 ; contracts expire through August 2012. At July 3, 2010, the amount of inventory purchases hedged was $46,650; contracts expire through October 2011.
(c)	No amounts were excluded from effectiveness testing

Location of

Gain (Loss)

Derivatives not designated as

Recognized in

Amount of Gain (Loss)

hedging instruments under

Nature of Hedged

Amount

Maturity

Income on

Recognized in Income on

FASB ASC 815-20

Transaction

Instrument

Hedged

Date

Derivative

Derivative

Three Months

Six Months

July 2,

Ended

Ended

2011

July 2, 2011

July 2, 2011

Foreign exchange contracts (e)

Intercompany sales of inventory

Forward contracts

7,234

April 2012

other loss/income

149

417

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

10,000

April 2012

other loss/income

(311

)

(983

)

Foreign exchange contracts

Intercompany payables

Forward contracts

28,000

January 2012

other loss/income

(603

)

(2,401

)

Foreign exchange contracts

Intercompany loans

Forward contracts

20,000

November 2011

other loss/income

(446

)

(1,601

)

Foreign exchange contracts

Intercompany loans

Forward contracts

28,328

September 2011

other loss/income

(663

)

(663

)

Total

$

(1,874

)

$

(5,231

)

Location of

Gain (Loss)

Derivatives not designated as

Recognized in

Amount of Gain (Loss)

hedging instruments under

Nature of Hedged

Amount

Maturity

Income on

Recognized in Income on

FASB ASC 815-20

Transaction

Instrument

Hedged

Date

Derivative

Derivative

Three Months

Six Months

July 3,

Ended

Ended

2010

July 3, 2010

July 3, 2010

Foreign exchange contracts (d)

Purchases of inventory

Forward contracts

$

907

August 2010

other loss/income

$

92

$

(110

)

Foreign exchange contracts (e)

Intercompany sales of inventory

Forward contracts

15,045

December 2011

other loss/income

(873

)

(791

)

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

10,000

April 2011

other loss/income

385

903

Foreign exchange contracts

Intercompany loans

Forward contracts

—

other loss/income

—

(94

)

Foreign exchange contracts

Intercompany payables

Forward contracts

34,000

March 2011

other loss/income

1,762

2,859

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

other loss/income

383

1,511

Foreign exchange contracts

Intercompany payables

Forward contracts

4,000

July 2010

selling, general and administrative

504

398

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

selling, general and administrative

45

(232

)

Total

$

2,298

$

4,444

(d)	Forward contracts used to offset 50% of U.S. dollar-denominated purchases of inventory by the Company’s foreign subsidiaries whose functional currencies were the Canadian dollar and Mexican peso, entered into by Warnaco Inc. on behalf of foreign subsidiaries.
(e)	Forward contracts used to offset 50% of British Pounds-denominated intercompany sales by a subsidiary whose functional currency is the Euro.
(f)	Forward contracts used to offset payment of minimum royalty and advertising costs related to sales of inventory by the Company’s foreign subsidiary whose functional currency was the Euro, entered into by Warnaco Inc. on behalf of a foreign subsidiary.

A reconciliation of the balance of Accumulated Other Comprehensive Income during the Six Months Ended July 2, 2011 and the Six Months Ended July 3, 2010 related to cash flow hedges of fluctuations in foreign currency exchange rates is as follows:

Balance January 2, 2010	$	(1,414	)
Derivative gains recognized		2,905
Gains amortized to earnings		418
Other		168
Balance before tax effect		2,077
Tax effect		(573	)
Balance July 3, 2010, net of tax	$	1,504
Balance January 1, 2011	$	(2,331	)
Derivative losses recognized		(4,495	)
Losses amortized to earnings		2,399
Balance before tax effect		(4,427	)
Tax effect		971
Balance July 2, 2011, net of tax	$	(3,456	)

During the twelve months following July 2, 2011, the net amount of losses that are recorded in Other Comprehensive Income at July 2, 2011 that are estimated to be amortized into earnings is $4,280,on a pre-tax basis. During the Six Months Ended July 2, 2011, the Company expected that all originally forecasted purchases of inventory or payment of minimum royalties, which were covered by cash flow hedges, would occur by the end of the respective originally specified time periods. Therefore, no amount of gains or losses was reclassified into earnings during the Six Months Ended July 2, 2011 as a result of the discontinuance of those cash flow hedges.