Fair Value Measurement, Financial Instruments And Risk Management

9 Months Ended

Sep. 25, 2011

Fair Value Measurement, Financial Instruments And Risk Management

Fair Value Measurement, Financial Instruments And Risk Management

Note 10. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair Value Measurement

We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:

Level 1	Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Because the Company's derivatives are not listed on an exchange, the Company values these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. The Company's methodology also incorporates the impact of both the Company's and the counterparty's credit standing.

The following tables represent our assets and liabilities measured at fair value on a recurring basis as of September 25, 2011 and December 26, 2010 and the basis for that measurement:

(amounts in thousands)	Total Fair Value Measurement September 25, 2011	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Foreign currency revenue forecast contracts	$   859	$ —	$   859	$ —
Foreign currency forward exchange contracts	570		570
Total assets	$1,429	$ —	$1,429	$ —
Foreign currency revenue forecast contracts	$     92	$ —	$     92	$ —
Foreign currency forward exchange contracts	253	—	253	—
Total liabilities	$   345	$ —	$   345	$ —

(amounts in thousands)	Total Fair Value Measurement December 26, 2010	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Foreign currency revenue forecast contracts	$ 938	$ —	$ 938	$ —
Foreign currency forward exchange contracts	27	—	27	—
Total assets	$ 965	$ —	$ 965	$ —
Foreign currency revenue forecast contracts	$ 278	$ —	$ 278	$ —
Foreign currency forward exchange contracts	20	—	20	—
Total liabilities	$ 298	$ —	$ 298	$ —

The following table provides a summary of the activity associated with all of our designated cash flow hedges (foreign currency) reflected in accumulated other comprehensive income for the nine months ended September 25, 2011:

(amounts in thousands)

	September 25, 2011
Beginning balance, net of tax	$     377
Changes in fair value gain, net of tax	(1,177)
Reclassification to earnings, net of tax	1,229
Ending balance, net of tax	$     429

We believe that the fair values of our current assets and current liabilities (cash, restricted cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at September 25, 2011 and December 26, 2010 are summarized in the following table:

(amounts in thousands)	September 25, 2011		December 26, 2010
	Carrying Amount	Estimated Fair Value	Carrying Amount	Estimated Fair Value
Long-term debt (including current maturities and excluding capital leases and factoring) (1)
Senior secured credit facility	$ 61,535	$ 61,535	$ 42,687	$ 42,687
Senior secured notes	$ 75,000	$ 75,072	$ 75,000	$ 75,787

(1)   The carrying amounts are reported on the balance sheet under the indicated captions.

Long-term debt is carried at the original offering price, less any payments of principal. Rates currently available to us for long-term borrowings with similar terms and remaining maturities are used to estimate the fair value of existing borrowings as the present value of expected cash flows.

Financial Instruments and Risk Management

We manufacture products in the U.S., the Caribbean, Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries.

We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading.

The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of September 25, 2011 and December 26, 2010:

(amounts in thousands)	September 25, 2011				December 26, 2010
	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign currency revenue forecast contracts	Other current assets	$   859	Other current liabilities	$  92	Other current assets	$  938	Other current liabilities	$  278
Total derivatives designated as hedging instruments		859		92		938		278
Derivatives not designated as hedging instruments
Foreign currency forward exchange contracts	Other current assets	570	Other current liabilities	253	Other current assets	27	Other current liabilities	20
Total derivatives not designated as hedging instruments		570		253		27		20
Total derivatives		$ 1,429		$ 345		$ 965		$ 298

The following tables present the amounts affecting the Consolidated Statement of Operations for the three months ended September 25, 2011 and September 26, 2010:

(amounts in thousands)	September 25, 2011				September 26, 2010
	Amount of  Gain (Loss) Recognized in Other Comprehensive Income on Derivatives	Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of  Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into  Income	Amount of Forward Points Recognized in Other Gain (Loss), net	Amount of  Gain (Loss) Recognized in Other Comprehensive Income on Derivatives	Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of  Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into  Income	Amount of Forward Points Recognized in Other Gain (Loss), net
Derivatives designated as cash flow hedges:
Foreign currency revenue forecast contracts	$  1,390	Cost of sales	$  (720)	$  (188)	$ (1,377)	Cost of sales	$  724	$ (2)
Total designated cash flow hedges	$ 1,390		$ (720)	$ (188)	$ (1,377)		$  724	$ (2)

The following tables present the amounts affecting the Consolidated Statement of Operations for the nine months ended September 25, 2011 and September 26, 2010:

(amounts in thousands)	September 25, 2011				September 26, 2010
	Amount of  Gain (Loss) Recognized in Other Comprehensive Income on Derivatives	Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of  Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into  Income	Amount of Forward Points Recognized in Other Gain (Loss), net	Amount of  Gain (Loss) Recognized in Other Comprehensive Income on Derivatives	Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of  Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into  Income	Amount of Forward Points Recognized in Other Gain (Loss), net
Derivatives designated as cash flow hedges:
Foreign currency revenue forecast contracts	$  (1,334)	Cost of sales	$  (1,214)	$  (293)	$ 705	Cost of sales	$    734	$ (28)
Interest rate swap contracts	—	Interest expense	—	—	171	Interest expense	(159)	—
Total designated cash flow hedges	$ (1,334)		$ (1,214)	$ (293)	$ 876		$    575	$ (28)

(amounts in thousands)	Quarter (13 weeks) Ended				Nine Months (39 weeks) Ended
	September 25, 2011		September 26, 2010		September 25, 2011		September 26, 2010
	Amount of Gain (Loss) Recognized in Income on Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives	Location of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments
Foreign exchange forwards and options	$ 185	Other gain (loss), net	$ (384)	Other gain (loss), net	$ (216)	Other gain (loss), net	$ 32	Other gain (loss), net

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations. As of September 25, 2011, we had currency forward exchange contracts with notional amounts totaling approximately $21.3 million. The fair values of the forward exchange contracts were reflected as a $0.6 million asset and $0.3 million liability and are included in other current assets and other current liabilities in the accompanying balance sheets. The contracts are in the various local currencies covering primarily our operations in the U.S., the Caribbean, and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.

Beginning in the second quarter of 2008, we entered into various foreign currency contracts to reduce our exposure to forecasted Euro-denominated inter-company revenues. These contracts were designated as cash flow hedges. The foreign currency contracts mature at various dates from October 2011 to August 2012. The purpose of these cash flow hedges is to eliminate the currency risk associated with Euro-denominated forecasted inter-company revenues due to changes in exchange rates. These cash flow hedging instruments are marked to market and the changes are recorded in other comprehensive income. Amounts recorded in other comprehensive income are recognized in cost of goods sold as the inventory is sold to external parties. Any hedge ineffectiveness is charged to other gain (loss), net on our Consolidated Statements of Operations. As of September 25, 2011, the fair value of these cash flow hedges were reflected as a $0.9 million asset and a $92 thousand liability and are included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is $24.3 million (€17.3 million) and the unrealized gain recorded in other comprehensive income was $0.4 million (net of taxes of $0.1 million), of which $0.2 million (net of taxes of $44 thousand) is expected to be reclassified to earnings over the next twelve months. During the three and nine months ended September 25, 2011, a $0.7 million and $1.2 million expense related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties, respectively. The Company recognized $0 and $0.1 million of hedge ineffectiveness during the three and nine months ended September 25, 2011, respectively.