Financial Instruments

9 Months Ended

Oct. 01, 2011

Financial Instruments [Abstract]

Financial Instruments

Note 11— Financial Instruments

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

		October 1, 2011				January 1, 2011				October 2, 2010
	Balance Sheet	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Location	Amount		Value		Amount		Value		Amount		Value
Assets:
Accounts receivable	Accounts receivable, net of reserves	$	341,406	$	341,406	$	318,123	$	318,123	$	346,464	$	346,464
Open foreign currency exchange contracts	Prepaid expenses and other current assets		4,761		4,761		834		834		231		231
Interest rate cap	Other assets		7,399		7,399		—		—		—		—
Liabilities:
Accounts payable	Accounts payable	$	182,517	$	182,517	$	152,714	$	152,714	$	165,171	$	165,171
Short-term debt	Short-term debt		43,355		43,355		32,172		32,172		69,607		69,607
Open foreign currency exchange contracts	Accrued liabilities		495		495		3,282		3,282		4,044		4,044
2011 Term loan, current portion	Short-term debt		2,000		1,950		—		—		—		—
2011 Term loan	Long-term debt		197,500		194,513		—		—		—		—

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 was estimated by obtaining quotes from brokers. 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 Nine Months Ended October 1, 2011 and the Nine Months Ended October 2, 2010, the Company’s Korean, European, Canadian and Mexican subsidiaries continued their hedging programs, which included foreign exchange forward contracts which were designed to satisfy either 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. 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 Nine Months Ended October 1, 2011 and the Nine Months Ended October 2, 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. During the Three Months Ended October 1, 2011, the Company initiated foreign currency exchange forward contracts, which were accounted for as economic hedges, in connection with the U.S. Dollar-denominated intercompany loan made upon the formation of the Company’s joint venture in India, which is held by a Singapore Dollar functional currency subsidiary (see Note 3 of Notes to Consolidated Condensed Financial Statements).

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 on average over the term of the Interest Rate Cap Agreement to 5.6975% per annum 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 October 1, 2011, January 1, 2011 and October 2, 2010:

		Asset Derivatives							Liability Derivatives
			Fair Value								Fair Value
		Balance Sheet	October 1,		January 1,		October 2,		Balance Sheet		October 1,		January 1,		October 2,
	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	$	1,873	$	—	$	—		Accrued liabilities	$	—	$	2,290	$	2,094
Interest rate cap	CF	Other assets		7,399		—		—				—		—		—
			$	9,272	$	—	$	—			$	—	$	2,290	$	2,094
Derivatives not designated as hedging instruments under FASB ASC 815-20
Foreign exchange contracts		Prepaid expenses and other current assets	$	2,888	$	834	$	231		Accrued liabilities	$	495	$	992	$	1,950
Total derivatives			$	12,160	$	834	$	231			$	495	$	3,282	$	4,044

(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 Nine Months Ended October 1, 2011 and the Three and Nine Months Ended October 2, 2010:

Derivatives in FASB ASC		Amount of Gain (Loss)						Location of Gain (Loss) Reclassified from Accumulated	Amount of Gain (Loss) Reclassified						Location of Gain (Loss) 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
		October 1,			October 2,				October 1,			October 2,				October 1,		October 2,
		2011			2010				2011			2010				2011		2010
Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	900		$	(1,128	)	cost of goods sold	$	(47	)	$	289		other loss/income	$	35	$	(49	)
Foreign exchange contracts	Purchases of inventory (b)		4,216			(2,842	)	cost of goods sold		(1,069	)		(93	)	other loss/income		149		(99	)
Interest rate cap	Interest expense on 2011 Term Loan		(6,996	)		—		interest expense		—			—		other loss/income		—		—
Total		$	(1,880	)	$	(3,970	)		$	(1,116	)	$	196			$	184	$	(148	)
		Nine Months			Nine Months				Nine Months			Nine Months				Nine Months		Nine Months
		Ended			Ended				Ended			Ended				Ended		Ended
		October 1,			October 2,				October 1,			October 2,				October 1,		October 2,
			2011			2010				2011			2010				2011		2010
Foreign exchange contracts	Minimum royalty and advertising costs (a)	$	(111	)	$	387		cost of goods sold	$	(708	)	$	689		other loss/income	$	16	$	(23	)
Foreign exchange contracts	Purchases of inventory (b)		732			(1,452	)	cost of goods sold		(2,807	)		(911	)	other loss/income		121		(25	)
Interest rate cap	Interest expense on 2011 Term Loan		(6,996	)		—		interest expense		—			—		other loss/income		—		—
Total		$	(6,375	)	$	(1,065	)		$	(3,515	)	$	(222	)		$	137	$	(48	)

(a)	At October 1, 2011, the amount of minimum royalty costs hedged was $11,366; contracts expire through June 2012. At October 2, 2010, the amount of minimum royalty costs hedged was $11,433; contracts expire through September 2011.
(b)	At October 1, 2011, the amount of inventory purchases hedged was $44,700 ; contracts expire through August 2012. At October 2, 2010, the amount of inventory purchases hedged was $60,100; contracts expire through February 2012.
(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

October 1,

Three Months

Nine Months

2011

Ended

Ended

October 1,

October 1,

2011

2011

Foreign exchange contracts (e)

Intercompany sales of inventory

Forward contracts

6,546

July 2012

other loss/income

(313

)

103

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

10,000

July 2012

other loss/income

723

(260

)

Foreign exchange contracts

Intercompany payables

Forward contracts

28,000

April 2012

other loss/income

556

(1,844

)

Foreign exchange contracts

Intercompany loans

Forward contracts

34,500

November 2011

other loss/income

2,460

859

Foreign exchange contracts

Intercompany loans

Forward contracts

—

other loss/income

819

156

Foreign exchange contracts

Intercompany loans

Forward contracts

6,000

July 2012

other loss/income

(495

)

(495

)

Total

$

3,750

$

(1,481

)

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

October 2,

Three Months

Nine Months

2010

Ended

Ended

October 2,

October 2,

2010

2010

Foreign exchange contracts (d)

Purchases of inventory

Forward contracts

$

—

other loss/income

$

(32

)

$

(142

)

Foreign exchange contracts (e)

Intercompany sales of inventory

Forward contracts

13,936

January 2012

other loss/income

712

(80

)

Foreign exchange contracts (f)

Minimum royalty and advertising costs

Forward contracts

12,500

October 2011

other loss/income

(976

)

(73

)

Foreign exchange contracts

Intercompany loans

Forward contracts

—

other loss/income

—

(94

)

Foreign exchange contracts

Intercompany payables

Forward contracts

35,000

May 2011

other loss/income

(3,115

)

(256

)

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

other loss/income

—

1,511

Foreign exchange contracts

Intercompany payables

Forward contracts

—

selling, general and administrative

—

398

Foreign exchange contracts

Intercompany payables

Zero-cost collars

—

selling, general and administrative

—

(232

)

Total

$

(3,411

)

$

1,032

(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 Nine Months Ended October 1, 2011 and the Nine Months Ended October 2, 2010 related to cash flow hedges is as follows:

Balance January 2, 2010	$	(1,414	)
Derivative losses recognized		(1,065	)
Losses amortized to earnings		222
Balance before tax effect		(2,257	)
Tax effect		803
Balance October 2, 2010, net of tax	$	(1,454	)
Balance January 1, 2011	$	(2,331	)
Derivative losses recognized		(6,375	)
Losses amortized to earnings		3,515
Balance before tax effect		(5,191	)
Tax effect		2,175
Balance October 1, 2011, net of tax	$	(3,016	)

During the twelve months following October 1, 2011, the net amount of gains recorded in Other Comprehensive Income at October 1, 2011 that are estimated to be amortized into earnings is $1,415, on a pre-tax basis. During the Nine Months Ended October 1, 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 Nine Months Ended October 1, 2011 as a result of the discontinuance of those cash flow hedges.