Derivative Instruments and Hedging Activities

6 Months Ended

Jul. 01, 2011

Derivative Instruments and Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     Interest rate agreements: The Company uses interest rate swaps to reduce its exposure to fluctuations in interest rates. The objective of the currently outstanding interest rate swaps (cash flow hedges) is to convert variable interest to fixed interest associated with forecasted interest payments resulting from revolving borrowings in the U.K. and continental Europe and are designated as hedging instruments. The Company does not enter into interest rate transactions for speculative purposes. Changes in the value of the interest rate swaps are expected to be highly effective in offsetting the changes attributable to fluctuations in the variable rates. The Company’s counterparties to its interest rate swap contracts have investment-grade credit ratings. The Company expects the creditworthiness of its counterparties to remain intact through the term of the transactions. When entered into, these financial instruments were designated as hedges of underlying exposures (interest payments associated with the U.K. and continental Europe borrowings) attributable to changes in the respective benchmark interest rates.

     As of July 1, 2011, the Company had two interest rate swap agreements outstanding with notional amounts of GBP 15 million and Euro 25 million. The GBP swap agreement obligates the Company to pay a fixed rate through July 2012 while the Euro swap agreement obligates the Company to pay a fixed rate through November 2011.

     Foreign currency forward contracts: The Company purchases foreign currency forward contracts to minimize the effect of fluctuating foreign currency-denominated accounts on its reported income. The foreign currency forward contracts are not designated as hedges for accounting purposes. The Company’s strategy is to negotiate terms for its derivatives and other financial instruments to be perfectly effective, such that the change in the value of the derivative perfectly offsets the impact of the underlying hedged item (e.g., various foreign currency-denominated accounts). The Company’s counterparties to its foreign currency forward contracts have investment-grade credit ratings. The Company expects the creditworthiness of its counterparties to remain intact through the term of the transactions. The Company regularly monitors the creditworthiness of its counterparties to ensure no issues exist which could affect the value of the derivatives.

     At July 1, 2011 and December 31, 2010, foreign currency forward contracts were revalued at then-current foreign exchange rates, with the changes in valuation reflected directly in “Other, net” in the Condensed consolidated statements of operations offsetting the transaction gain/loss recorded on the foreign currency-denominated accounts. At July 1, 2011 and December 31, 2010, the notional amount of the foreign currency forward contracts outstanding was approximately $210.6 million and $223.0 million, respectively. The Company recorded losses on its foreign currency forward contracts in the three and six months ended July 1, 2011 of $5.7 million and $3.5 million, respectively, and gains of $0.8 million and $4.3 million in the three and six months ended July 2, 2010, respectively. Included in the gains and losses on the Company’s foreign currency forward contracts were costs associated with the hedging programs of $0.5 million and $1.0 million for the three months and six months, respectively, ended July 1, 2011 and July 2, 2010. The Company recorded gains on the foreign currency-denominated accounts that were economically hedged in the three and six months ended July 1, 2011 of $4.2 million and $1.8 million, respectively, and losses of $2.9 million and $7.7 million in the three and six months ended July 2, 2010, respectively. The Company does not hedge 100% of its foreign currency-denominated accounts and results of the hedging can vary significantly based on various factors, such as the timing of executing the foreign currency forward contracts versus the movement of the currencies as well as the fluctuations in the account balances throughout each reporting period.

     See Note 7. “Fair Value Measurements” for information related to the fair value of interest rate agreements and foreign currency forward contracts.