Derivatives and Fair Value Measurements

All derivatives are recognized in the accompanying Consolidated Balance Sheets at their estimated fair values. The Company currently has cash flow hedges related to variable rate debt and forecasted foreign currency payments. The Company does not enter into derivatives for speculative purposes. Changes in the fair value of the derivatives that qualify as cash flow hedges are recorded in “Accumulated other comprehensive income” in the accompanying Consolidated Balance Sheets until earnings are affected by the variability of the cash flows.

The Company’s Malaysian operations have entered into forward exchange contracts on a rolling basis with a total notional value of $54.1 million as of September 29, 2012. These forward contracts will fix the exchange rates on foreign currency cash used to pay a portion of local currency expenses. The total fair value of these forward contracts was a $1.1 million asset as of September 29, 2012, and a $1.5 million liability as of October 1, 2011.

The Company entered into three interest rate swap contracts related to the $150 million in term loans under its Prior Credit Facility that had an initial total notional value of $150 million and mature on April 4, 2013. These interest rate swap contracts continued into the Credit Facility and pay the Company variable interest at the three month LIBOR rate, and the Company pays the counterparties a fixed interest rate. The fixed interest rates for each of these contracts are 4.415%, 4.490% and 4.435%, respectively. These interest rate swap contracts were originally entered into to convert $150 million of the variable rate term loan under the Prior Credit Facility into fixed rate debt. Based on the terms of the interest rate swap contracts and the underlying debt, these interest rate contracts were determined to be effective, and thus qualify as a cash flow hedge. As such, any changes in the fair value of these interest rate swaps are recorded in “Accumulated other comprehensive income” on the accompanying Consolidated Balance Sheets until earnings are affected by the variability of cash flows. The total fair value of these interest rate swap contracts was a $1.7 million liability as of September 29, 2012 and a $5.2 million liability as of October 1, 2011. As of September 29, 2012, the total remaining combined notional amount of the Company’s three interest rate swaps was $82.5 million.

The Company’s Mexican operations were parties to forward exchange contracts all of which were settled as of the third quarter of fiscal 2012. The total fair value of these forward contracts was a $1.0 million liability as of October 1, 2011.

During the second quarter of fiscal 2011, the Company entered into forward exchange contracts to fix the exchange rates on foreign currency cash used to pay for capital expenditures related to the construction of the Company’s fourth facility in Malaysia; these contracts were settled as of the end of the first quarter of fiscal 2012. The total fair value of these forward contracts was a $0.1 million liability as of October 1, 2011.

During fiscal 2011, the Company entered into treasury rate lock hedge contracts to hedge the variability of the fixed interest rate on the then-forecasted issuance of $175 million of fixed rate debt using a treasury lock transaction. During the third quarter of fiscal 2011, when the fixed interest rate for the debt issuance was determined, all treasury rate lock contracts were settled and the Company received proceeds of $2.3 million, which is being amortized over the seven year term of the related debt.

The tables below present information regarding the fair values of derivative instruments (as defined in Note 1, "Description of Business and Significant Accounting Policies") and the effects of derivative instruments on the Company’s Consolidated Financial Statements:

Fair Values of Derivative Instruments

In thousands of dollars

Asset Derivatives

Liability Derivatives

September 29,
2012

October 1,
2011

September 29,
2012

October 1,
2011

Derivatives designated

as hedging instruments

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

Interest rate swaps

$—

Current liabilities –

Other

$1,715

$3,493

Interest rate swaps

$—

Other liabilities

$—

$1,746

Forward contracts

Prepaid expenses and other

$1,095

$—

Current liabilities –

Other

$—

$2,544



The Effect of Derivative Instruments on the Statements of Operations for the Twelve Months Ended
In thousands of dollars
Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivative (Effective Portion)		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative(Ineffective Portion and Amount Excluded from Effectiveness Testing)
	September 29, 2012	October 1, 2011		September 29, 2012	October 1, 2011		September 29, 2012	October 1, 2011
Interest rate swaps	$(40)	$(510)	Interest income (expense)	$(3,564)	$(4,310)	Other income (expense)	$—	$—
Forward contracts	$3,021	$(1,468)	Selling and administrative expenses	$(597)	$3,423	Other income (expense)	$—	$—
Treasury Rate Locks	$—	$2,281	Interest income (expense)	$320	$125	Other income (expense)	$—	$—

The following table lists the fair values of the Company’s derivatives as of September 29, 2012, by input level as defined in Note 1, "Description of Business and Significant Accounting Policies":



	Fair Value Measurements Using Input Levels Asset/ (Liability) (in thousands):
Fiscal year ended September 29, 2012	Level 1	Level 2	Level 3	Total
Derivatives
Interest rate swaps	$—	$(1,715)	$—	$(1,715)
Forward currency forward contracts	$—	$1,095	$—	$1,095

Fiscal year ended October 1, 2011
Derivatives
Interest rate swaps	$—	$(5,239)	$—	$(5,239)
Forward currency forward contracts	$—	$(2,544)	$—	$(2,544)

The fair value of interest rate swaps and foreign currency forward contracts is determined using a market approach, which includes obtaining directly or indirectly observable values from third parties active in the relevant markets. The primary input in the fair value of the interest rate swaps is the relevant LIBOR forward curve. Inputs in the fair value of the foreign currency forward contracts include prevailing forward and spot prices for currency and interest rate forward curves.