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.

Our financial assets and liabilities are measured using a fair value hierarchy that 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 December 30, 2012 and December 25, 2011 and the basis for that measurement:



(amounts in thousands)	Total Fair Value Measurement December 30, 2012		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Foreign currency forward exchange contracts	$	179	$	—	$	179	$	—
Foreign currency revenue forecast contracts	14		—		14		—
Total assets	$	193	$	—	$	193	$	—

Foreign currency forward exchange contracts	$	208	$	—	$	208	$	—
Total liabilities	$	208	$	—	$	208	$	—



(amounts in thousands)	Total Fair Value Measurement December 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 forward exchange contracts	$	463	$	—	$	463	$	—
Foreign currency revenue forecast contracts	1,120		—		1,120		—
Total assets	$	1,583	$	—	$	1,583	$	—

Foreign currency forward exchange contracts	$	415	$	—	$	415	$	—
Total liabilities	$	415	$	—	$	415	$	—

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 years ended December 30, 2012 and December 25, 2011:



(amounts in thousands)	December 30, 2012			December 25, 2011
Beginning balance, net of tax	$	1,542		$	377
Changes in fair value gain, net of tax	481			(643		)
Reclass to earnings, net of tax	(2,002		)	1,808
Ending balance, net of tax	$	21		$	1,542

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 December 30, 2012 and December 25, 2011 are summarized in the following table:



	December 30, 2012				December 25, 2011
(amounts in thousands)	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	$	42,021	$	42,021	$	52,248	$	52,248
Senior secured notes	$	66,114	$	66,549	$	75,000	$	75,686


⁽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. The Senior Secured Credit Facility’s maturity date is in the year 2014 and the Senior Secured Notes mature in the years 2015 through 2017.

Nonrecurring Fair Value Measurements

In 2012, in connection with our annual impairment test, goodwill with a carrying amount of $61.5 million was written down to its implied fair value of $23.2 million. This resulted in a $38.3 million goodwill impairment charge that was recorded in goodwill impairment expense in the Retail Merchandising Solutions segment on the Consolidated Statement of Operations. The nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). The fair value was computed using a discounted cash flow valuation methodology. Refer to Note 5 of the Consolidated Financial Statements.

In 2011, as a result of our annual impairment test, our SIDEP indefinite-lived trade name with a carrying amount of $0.8 million was written down to its implied fair value of $0.2 million. This resulted in a $0.6 million impairment charge that was recorded in asset impairment in the Shrink Management Solutions segment on the Consolidated Statement of Operations. The nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). The fair value was computed using the relief from royalty income valuation approach. Refer to Note 5 of the Consolidated Financial Statements.

Severance costs included in our restructuring charges are calculated using internal estimates and are therefore classified as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.

Accrued restructuring costs for lease termination liabilities were valued using a discounted cash flow model. Significant assumptions used in determining the amount of the estimated liability include the estimated liabilities for future rental payments on vacant facilities as of their respective cease-use dates and the discount rate utilized to determine the present value of the future expected cash flows. If our assumptions regarding early terminations and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses or gains in the Consolidated Financial Statements. Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.

In connection with our restructuring plans, we have recorded impairment losses in restructuring expense during the years ended December 30, 2012 and December 25, 2011 due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 15 of the Consolidated Financial Statements.

Financial Instruments and Risk Management

We manufacture products in the U.S., 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 December 30, 2012 and December 25, 2011:



	December 30, 2012						December 25, 2011
	Asset Derivatives			Liability Derivatives			Asset Derivatives			Liability Derivatives
(amounts in thousands)	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	$	14	Other current liabilities	$	—	Other current assets	$	1,120	Other current liabilities	$	—
Total derivatives designated as hedging instruments		14			—			1,120			—
Derivatives not designated as hedging instruments
Foreign currency forward exchange contracts	Other current assets	179		Other current liabilities	208		Other current assets	463		Other current liabilities	415
Total derivatives not designated as hedging instruments		179			208			463			415
Total derivatives		$	193		$	208		$	1,583		$	415

The following tables present the amounts affecting the Consolidated Statement of Operations for the years ended December 30, 2012, December 25, 2011, and December 26, 2010:



	December 30, 2012
(amounts in thousands)	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	$	507	Cost of sales	$	(1,994	)	$	102
Total designated cash flow hedges	$	507		$	(1,994	)	$	102



	December 25, 2011
(amounts in thousands)	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	$	(658	)	Cost of sales	$	(1,792	)	$	(296	)
Total designated cash flow hedges	$	(658	)		$	(1,792	)	$	(296	)



	December 26, 2010
(amounts in thousands)	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	$	1,940	Cost of sales	$	1,194		$	(124	)
Interest rate swap contracts	171		Interest expense	(159		)	—
Total designated cash flow hedges	$	2,111		$	1,035		$	(124	)

December 30, 2012

December 25, 2011

December 26, 2010

(amounts in thousands)

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

261

Other gain

(loss), net

(155

)

Other gain

(loss), net

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 December 30, 2012, we had currency forward exchange contracts with notional amounts totaling approximately $17.1 million. The fair values of the forward exchange contracts were reflected as a $0.2 million asset and $0.2 million liability and are included in other current assets and other current liabilities in the accompanying Consolidated 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 January 2013 to March 2013. The purpose of these cash flow hedges is to reduce 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 December 30, 2012, the fair value of these cash flow hedges was reflected as a $14 thousand asset and is included in other current assets in the accompanying Consolidated Balance Sheets. The total notional amount of these hedges is $3.9 million (€2.9 million) and the unrealized gain recorded in other comprehensive income was $0.2 million (net of taxes of $6 thousand), of which $0.2 million is expected to be reclassified to earnings over the next twelve months. During the year ended December 30, 2012, a $2.0 million benefit related to these foreign currency hedges was recorded to cost of goods sold as the inventory was sold to external parties. The Company recognized a $0.1 million gain during the year ended December 30, 2012 for hedge ineffectiveness.

During the first quarter of 2008, we entered into an interest rate swap agreement with a notional amount of $40 million. The purpose of this interest rate swap agreement was to hedge potential changes to our cash flows due to the variable interest nature of our senior unsecured credit facility. The interest rate swap was designated as a cash flow hedge. This cash flow hedging instrument was marked to market and the changes were recorded in other comprehensive income. The interest rate swap matured on February 18, 2010.

Aggregate foreign currency transaction losses in 2012, 2011, and 2010, were $1.7 million, $2.1 million, and $2.7 million, respectively, and are included in other gain (loss), net on the Consolidated Statements of Operations.

Additionally, there were no deferrals of gains or losses on currency forward exchange contracts at December 30, 2012.