Derivative Instruments And Hedging Activities

9 Months Ended

Jul. 03, 2011

Derivative Instruments And Hedging Activities

Derivative Instruments And Hedging Activities

6. Derivative Instruments and Hedging Activities

The Company operates globally, and its earnings and cash flows are exposed to market risk from changes in currency exchange rates. The Company addresses these risks through a risk management program that includes the use of derivative financial instruments. The program is operated pursuant to documented corporate risk management policies. The Company does not enter into any derivative transactions for speculative purposes. The Company recognizes all derivative financial instruments in the condensed consolidated financial statements at fair value in accordance with FASB ASC 815, Derivatives and Hedging.

Designated Foreign Currency Contracts

The Company sometimes uses foreign currency forward contracts to manage its currency transaction exposures from forecasted foreign currency denominated sales to its subsidiaries. These foreign currency forward contracts are designated as cash flow hedges under FASB ASC 815, Derivatives and Hedging. Therefore, the effective portion of the gain or loss is reported as a component of other comprehensive income and will be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of the derivative's change in fair value is recognized currently through earnings regardless of whether the instrument is designated as a hedge. At July 3, 2011, the Company had two foreign currency forward contracts designated as hedging instruments outstanding, all maturing in less than twelve months, to exchange the Euro for U.S. Dollars totaling approximately $5.4 million.

Net recognized losses from foreign currency forward contracts totaled approximately $223,000 and $369,000 during the three and nine months ended July 3, 2011 and are included in the condensed consolidated statements of income. The net settlement amount of the outstanding contracts recorded in "accumulated other comprehensive income" to recognize the effective portion of the fair value of the contracts at July 3, 2011 was an unrealized loss of approximately $345,000. The net settlement of these outstanding contracts will be reclassified to earnings within the next twelve months.

The following table presents the effect of the Company's derivative instruments designated as hedging instruments on the condensed consolidated statements of income as of July 3, 2011 (in thousands):

Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassed from AOCI into Earnings (Effective Portion)			Location in Statement of Income	Amount of Gain (Loss) Recognized in Earnings on Ineffective Portion and Amount Excluded from Effectiveness Testing		Location in Statement of Income
Three months Ended July 3, 2011
Foreign currency contracts	$	39		$	(223	)	Investment and other income (expense), net	$	—
	$	39		$	(223	)		$	—
Derivatives Designated as Hedging Instruments	Amount of Gain (Loss) Recognized in OCI (Effective Portion)			Amount of Gain (Loss) Reclassed from AOCI into Earnings (Effective Portion)			Location in Statement of Income	Amount of Gain (Loss) Recognized in Earnings on Ineffective Portion and Amount Excluded from Effectiveness Testing		Location in Statement of Income
Nine Months Ended July 3, 2011
Foreign currency contracts	$	(345	)	$	(373	)	Investment and other income (expense), net	$	—
	$	(345	)	$	(373	)		$	—

The following table presents the fair value of the Company's derivative instruments designated as a hedging instruments on the condensed consolidated balance sheet as of July 3, 2011 (in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value
Current liabilities
Foreign currency contracts	Accrued expenses and other liabilities	$	345
Total current liabilities		$	345

The Company did not enter into any derivative contracts designated as hedging instruments in the first nine months of fiscal 2010.

Non-Designated Foreign Currency Contracts

The Company also at times uses foreign currency forward contracts to manage its currency transaction exposures with intercompany receivables denominated in foreign currencies. These currency forward contracts are not designated as cash flow, fair value or net investment hedges under FASB ASC 815, Derivatives and Hedging, and therefore, are marked to market with changes in fair value recorded to earnings. These derivative instruments do not subject the Company's earnings or cash flows to material risk since gains and losses on those derivatives generally offset losses and gains on the assets and liabilities being hedged.

The Company did not have any foreign currency forward contracts not designated as hedging instruments outstanding at July 3, 2011.

The Company had one foreign currency forward contract outstanding at October 3, 2010, serving to mitigate the foreign currency risk of a substantial portion of the Company's Euro-denominated intercompany balances in the notional amount of approximately 5 million Euros. The fair value of this contract at October 3, 2010 was approximately $6.9 million, resulting in an unrealized loss of approximately $25,000 for the period ended October 3, 2010. We estimate the fair value of the derivative instruments based on the exchange rates of the underlying currencies.

The following table presents the fair value of the Company's derivative instrument not designated as a hedging instrument as of October 3, 2010 (in thousands):

Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	Fair Value
Current liabilities
Foreign currency contracts	Accrued expenses and other current liabilities	$	25
Total current assets		$	25

The following table presents the pretax impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings during the three months ended July 3, 2011 and July 4, 2010, respectively:

(000's omitted)	Location of Gain (Loss) Recognized in Income	Gain (Loss) Recognized in Income
		Three Months Ended July 3, 2011		Three Months Ended July 4, 2010
Foreign currency contracts	Investment and other income (expense), net	$	125	$	517

The following table presents the pretax impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings during the nine months ended July 3, 2011 and July 4, 2010, respectively:

(000's omitted)	Location of Gain (Loss) Recognized in Income	Gain (Loss) Recognized in Income
		Nine Months Ended July 3, 2011		Nine Months Ended July 4, 2010
Foreign currency contracts	Investment and other income (expense), net	$	90	$	1,147