Derivative Instruments and Hedging Activities

6 Months Ended

Dec. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments & Hedging Activities

The Company enters into derivative contracts designated as cash flow hedges to manage certain interest rate, foreign currency and commodity exposures. Company policy allows derivatives to be used only for identifiable exposures and, therefore, the Company does not enter into hedges for trading purposes where the sole objective is to generate profits.

The Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Derivative financial instruments are recorded on the Consolidated Condensed Balance Sheets as assets or liabilities, measured at fair value. The effective portion of gains or losses on the derivative designated as cash flow hedges are reported as a component of Accumulated Other Comprehensive Loss (AOCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings.

The Company enters into interest rate swaps to manage a portion of its interest rate risk from financing certain dealer and distributor inventories through a third party financing source. The swaps are designated as cash flow hedges and are used to effectively fix the interest payments to a third party financing source, exclusive of lender spreads, ranging from 1.36% to 1.60% for a notional principal amount of $85 million through July 2017.

The Company enters into forward foreign currency contracts to hedge the risk from forecasted third party and intercompany sales or payments denominated in foreign currencies. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Japanese Yen, Australian Dollars or Canadian Dollars. These contracts generally do not have a maturity of more than twenty-four months.

The Company uses raw materials that are subject to price volatility. The Company hedges a portion of its exposure to the variability of cash flows associated with commodities used in the manufacturing process by entering into forward purchase contracts or commodity swaps. Derivative contracts designated as cash flow hedges are used by the Company to reduce exposure to variability in cash flows associated with future purchases of natural gas and aluminum. These contracts generally do not have a maturity of more than twenty-four months.

The Company has considered the counterparty credit risk related to all its interest rate, foreign currency and commodity derivative contracts and deems any risk of counterparty default to be minimal.

The notional amount of derivative contracts outstanding at the end of the period is indicative of the level of the Company’s derivative activity during the period. As of December 30, 2012 and July 1, 2012, the Company had the following outstanding derivative contracts (in thousands):

Contract		Notional Amount
		December 30, 2012	July 1, 2012
Interest Rate:
LIBOR Interest Rate (U.S. Dollars)	Fixed	85,000	85,000
Foreign Currency:
Australian Dollar	Sell	21,740	28,258
Canadian Dollar	Sell	3,250	—
Euro	Sell	61,000	53,500
Japanese Yen	Buy	1,210,000	695,000
Commodity:
Natural Gas (Therms)	Buy	5,469	5,614
Aluminum (Metric Tons)	Buy	23	24

The location and fair value of derivative instruments reported in the Consolidated Condensed Balance Sheets are as follows (in thousands):

Balance Sheet Location	Asset (Liability) Fair Value
	December 30, 2012			July 1, 2012
Interest rate contract
Other Long-Term Liabilities	$	(2,900	)	$	(2,341	)
Foreign currency contracts
Other Current Assets	89			1,888
Other Long-Term Assets	16			24
Accrued Liabilities	(3,253		)	(452		)
Other Long-Term Liabilities	(403		)	—
Commodity contracts
Other Current Assets	27			14
Other Long-Term Assets	15			—
Accrued Liabilities	(4,736		)	(8,510		)
	$	(11,145	)	$	(9,377	)

The effect of derivatives designated as hedging instruments on the Consolidated Condensed Statements of Operations is as follows (in thousands):

	Three months ended December 30, 2012
	Recognized in Earnings
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contract	$	112		Net Sales	$	—		$	—
Foreign currency contracts - sell	(901		)	Net Sales	(486		)	—
Foreign currency contracts - buy	(251		)	Cost of Goods Sold	(201		)	—
Commodity contracts	(656		)	Cost of Goods Sold	(2,914		)	—
	$	(1,696	)		$	(3,601	)	$	—

	Three months ended January 1, 2012
	Recognized in Earnings
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contract	$	(304	)	Net Sales	$	—		$	—
Foreign currency contracts - sell	(401		)	Net Sales	1,182			—
Foreign currency contracts - buy	—			Cost of Goods Sold	(57		)	—
Commodity contracts	(2,387		)	Cost of Goods Sold	(903		)	8
	$	(3,092	)		$	222		$	8

	Six months ended December 30, 2012
	Recognized in Earnings
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contract	$	(341	)	Net Sales	$	—		$	—
Foreign currency contracts - sell	(1,834		)	Net Sales	88			—
Foreign currency contracts - buy	(261		)	Cost of Goods Sold	(73		)	—
Commodity contracts	1,795			Cost of Goods Sold	(4,091		)	—
	$	(641	)		$	(4,076	)	$	—

	Six months ended January 1, 2012
	Recognized in Earnings
	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives, Net of Taxes (Effective Portion)			Classification of Gain (Loss)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contract	$	(513	)	Net Sales	$	—		$	—
Foreign currency contracts - sell	2,753			Net Sales	(62		)	—
Foreign currency contracts - buy	—			Cost of Goods Sold	(57		)	—
Commodity contracts	(5,342		)	Cost of Goods Sold	(1,241		)	(22		)
	$	(3,102	)		$	(1,360	)	$	(22	)

During the next twelve months, the estimated net amount of losses on cash flow hedges as of December 30, 2012 expected to be reclassified into earnings is $7.5 million.