Derivative Financial Instruments

9 Months Ended

Aug. 01, 2014

Derivative Financial Instruments

Note 6 – Derivative Financial Instruments

The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company’s policy is to execute such instruments with banks the Company believes to be creditworthy and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.

All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.

The fair values of derivative instruments are presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. At August 1, 2014, the Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.

Foreign Currency Forward Exchange Contracts

The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At August 1, 2014, and October 25, 2013, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $375.7 million and $369.0 million, respectively. These notional values consist primarily of contracts for the European euro, British pound sterling and Canadian dollar, and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.

Interest Rate Swaps

The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time should moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective. In fiscal 2010, the Company entered into interest rate swap agreements for $175.0 million on the 2017 Notes. The swap agreements exchanged the fixed interest rate on the 2017 Notes of 6.625% for a variable interest rate. In the second fiscal quarter of 2013, the swap agreements were terminated and the Company redeemed the 2017 Notes with the proceeds from the $175.0 million U.S. Term Loan. The Company recorded a gain on the swap termination of $2.9 million in the second fiscal quarter of 2013.

Embedded Derivative Instruments

The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency.

Net Investment Hedge

In July 2011, the Company entered into a Euro Term Loan for €125.0 million under the secured credit facility. The Company designated the Euro Term Loan a hedge of the investment in a certain French business unit. The foreign currency gain or loss that is effective as a hedge is reported as a component of other comprehensive income in shareholders’ equity. To the extent that this hedge is ineffective, the foreign currency gain or loss is recorded in earnings. There was no ineffectiveness since inception of the hedge.  On June 30, 2014, the Company paid off the remaining balance of the Euro Term Loan.  As a result, the Company recorded a net loss of $0.5 million on extinguishment of debt.

Fair Value of Derivative Instruments

Fair values of derivative instruments in the Consolidated Balance Sheet at August 1, 2014, and October 25, 2013, consisted of:

(In thousands)		Fair Value
		August 1,		October 25,
	Classification	2014		2013
Foreign Currency Forward Exchange Contracts:
	Other current assets	$	2,969	$	4,547
	Other assets		1,175		1,393
	Accrued liabilities		7,612		3,002
	Other liabilities		1,458		1,661
Embedded Derivative Instruments:
	Other current assets	$	141	$	59
	Other assets		1,081		647
	Accrued liabilities		312		344
	Other liabilities		206		-

The effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three and nine month periods ended August 1, 2014, and July 26, 2013, consisted of:

Fair Value Hedges

We recognized the following gains (losses) on contracts designated as fair value hedges:

(In thousands)	Three Months Ended					Nine Months Ended
Gain (Loss)	August 1,			July 26,		August 1,		July 26,
	2014			2013		2014		2013
Interest rate swap contracts:
Recognized in interest expense	$	-		$	-	$	-	$	(1,058	)
Recognized in loss on extinguishment of debt		-			-		-		2,918
Embedded derivatives:
Recognized in sales		(651	)		284		215		1,541

Cash Flow Hedges

We recognized the following gains (losses) on contracts designated as cash flow hedges:

(In thousands)	Three Months Ended						Nine Months Ended
Gain (Loss)	August 1,			July 26,			August 1,			July 26,
	2014			2013			2014			2013
Foreign currency forward exchange contracts:
Recognized in AOCI (effective portion)	$	1,873		$	(544	)	$	(858	)	$	(1,975	)
Reclassified from AOCI into sales		(893	)		(551	)		(3,638	)		(1,187	)

Net Investment Hedges

We recognized the following gains (losses) on contracts designated as net investment hedges:

(In thousands)	Three Months Ended					Nine Months Ended
Gain (Loss)	August 1,		July 26,			August 1,		July 26,
	2014		2013			2014		2013
Euro term loan:
Recognized in AOCI	$	162	$	(886	)	$	134	$	(1,310	)

During the first nine months of fiscal 2014 and 2013, the Company recorded losses of $0.8 million and $1.5 million, respectively, on foreign currency forward exchange contracts that have not been designated as an accounting hedge. These foreign currency exchange losses are included in selling, general and administrative expense.

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the first nine months of fiscal 2014 and 2013. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first nine months of fiscal 2014 and 2013.

Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $5.7 million of net loss into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at August 1, 2014, is 24 months.