Derivative Financial Instruments | 9 Months Ended |
Jun. 29, 2014 |
Derivative Financial Instruments [Abstract] | ' |
Derivative Financial Instruments | ' |
8 DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency exchange rate and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are reported at fair value in the Condensed Consolidated Statements of Financial Position (Unaudited). When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is recognized in earnings in the period incurred. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also recognized in earnings in the period incurred. |
Fair Value of Derivative Instruments |
The Company discloses its derivative instruments and hedging activities in accordance with ASC Topic 815: “Derivatives and Hedging” (“ASC 815”). |
The fair value of the Company’s outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows: |
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Asset Derivatives | | | 29-Jun-14 | | 30-Sep-13 | | | | | | |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | | | |
Commodity contracts | Receivables—Other | | $ | 1,350 | | $ | 416 | | | | | | |
Commodity contracts | Deferred charges and other | | | — | | | 3 | | | | | | |
Foreign exchange contracts | Receivables—Other | | | 656 | | | 1,719 | | | | | | |
Foreign exchange contracts | Deferred charges and other | | | 95 | | | — | | | | | | |
Total asset derivatives designated as hedging instruments under ASC 815 | | | | 2,101 | | | 2,138 | | | | | | |
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | |
Commodity contracts | Receivables—Other | | | 54 | | | — | | | | | | |
Foreign exchange contracts | Receivables—Other | | | 167 | | | 143 | | | | | | |
Total asset derivatives | | | $ | 2,322 | | $ | 2,281 | | | | | | |
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The fair value of the Company’s outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) are as follows: |
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Liability Derivatives | | | 29-Jun-14 | | 30-Sep-13 | | | | | | |
Derivatives designated as hedging instruments under ASC 815: | | | | | | | | | | | | | |
Interest rate contracts | Other current liabilities | | $ | 1,416 | | $ | — | | | | | | |
Interest rate contracts | Accrued interest | | | 430 | | | — | | | | | | |
Interest rate contracts | Other long-term liabilities | | | 57 | | | — | | | | | | |
Commodity contracts | Accounts payable | | | 5 | | | 450 | | | | | | |
Foreign exchange contracts | Accounts payable | | | 4,964 | | | 4,577 | | | | | | |
Foreign exchange contracts | Other long-term liabilities | | | 341 | | | 65 | | | | | | |
Total liability derivatives designated as hedging instruments under ASC 815 | | | $ | 7,213 | | $ | 5,092 | | | | | | |
Derivatives not designated as hedging instruments under ASC 815: | | | | | | | | | | | | | |
Commodity contract | Accounts payable | | $ | — | | $ | 55 | | | | | | |
Foreign exchange contracts | Accounts payable | | | 303 | | | 5,323 | | | | | | |
Total liability derivatives | | | $ | 7,516 | | $ | 10,470 | | | | | | |
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Changes in AOCI from Derivative Instruments |
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income ("AOCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. See Note 3, "Comprehensive Income (Loss)" for further information. |
The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended June 29, 2014, pretax: |
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| | | | | | | | | | Location of | | | |
| | | | | | | | | | Gain (Loss) | | | |
| | | | | | | | | | Recognized in | | Amount of |
| | | | | | | | | | Income on | | Gain (Loss) |
| | | | | | | | | | Derivatives | | Recognized in |
| | Amount of | | Location of | | | | (Ineffective | | Income on |
| | Gain (Loss) | | Gain (Loss) | | Amount of | | Portion and | | Derivatives |
| | Recognized in | | Reclassified from | | Gain (Loss) | | Amount | | (Ineffective Portion |
| | AOCI on | | AOCI into | | Reclassified from | | Excluded from | | and Amount |
Derivatives in ASC 815 Cash Flow | | Derivatives | | Income | | AOCI into Income | | Effectiveness | | Excluded from |
Hedging Relationships | | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | Testing) | | Effectiveness Testing) |
Commodity contracts | | $ | 1,342 | | Cost of goods sold | | $ | 120 | | Cost of goods sold | | $ | 35 |
Interest rate contracts | | | -1,903 | | Interest expense | | | -430 | | Interest expense | | | — |
Foreign exchange contracts | | | -9 | | Net sales | | | 58 | | Net sales | | | — |
Foreign exchange contracts | | | -2,432 | | Cost of goods sold | | | -1,021 | | Cost of goods sold | | | — |
Total | | $ | -3,002 | | | | $ | -1,273 | | | | $ | 35 |
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The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended June 29, 2014, pretax: |
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| | | | | | | | | | Location of | | | |
| | | | | | | | | | Gain (Loss) | | | |
| | | | | | | | | | Recognized in | | Amount of |
| | | | | | | | | | Income on | | Gain (Loss) |
| | | | | | | | | | Derivatives | | Recognized in |
| | Amount of | | Location of | | | | (Ineffective | | Income on |
| | Gain (Loss) | | Gain (Loss) | | Amount of | | Portion and | | Derivatives |
| | Recognized in | | Reclassified from | | Gain (Loss) | | Amount | | (Ineffective Portion |
| | AOCI on | | AOCI into | | Reclassified from | | Excluded from | | and Amount |
Derivatives in ASC 815 Cash Flow | | Derivatives | | Income | | AOCI into Income | | Effectiveness | | Excluded from |
Hedging Relationships | | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | Testing) | | Effectiveness Testing) |
Commodity contracts | | $ | 1,411 | | Cost of goods sold | | $ | 72 | | Cost of goods sold | | $ | 35 |
Interest rate contracts | | | -1,903 | | Interest expense | | | -430 | | Interest expense | | | — |
Foreign exchange contracts | | | 138 | | Net sales | | | 179 | | Net sales | | | — |
Foreign exchange contracts | | | -3,565 | | Cost of goods sold | | | -1,977 | | Cost of goods sold | | | — |
Total | | $ | -3,919 | | | | $ | -2,156 | | | | $ | 35 |
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The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three month period ended June 30, 2013, pretax: |
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| | | | | | | | | | Location of | | | |
| | | | | | | | | | Gain (Loss) | | | |
| | | | | | | | | | Recognized in | | Amount of |
| | | | | | | | | | Income on | | Gain (Loss) |
| | | | | | | | | | Derivatives | | Recognized in |
| | Amount of | | Location of | | | | (Ineffective | | Income on |
| | Gain (Loss) | | Gain (Loss) | | Amount of | | Portion and | | Derivatives |
| | Recognized in | | Reclassified from | | Gain (Loss) | | Amount | | (Ineffective Portion |
| | AOCI on | | AOCI into | | Reclassified from | | Excluded from | | and Amount |
Derivatives in ASC 815 Cash Flow | | Derivatives | | Income | | AOCI into Income | | Effectiveness | | Excluded from |
Hedging Relationships | | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | Testing) | | Effectiveness Testing) |
Commodity contracts | | $ | -930 | | Cost of goods sold | | $ | -321 | | Cost of goods sold | | $ | 11 |
Foreign exchange contracts | | | 89 | | Net sales | | | 313 | | Net sales | | | — |
Foreign exchange contracts | | | 4,034 | | Cost of goods sold | | | 515 | | Cost of goods sold | | | — |
Total | | $ | 3,193 | | | | $ | 507 | | | | $ | 11 |
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The following table summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the nine month period ended June 30, 2013, pretax: |
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| | | | | | | | | | | | | |
| | | | | | | | | | Location of | | | |
| | | | | | | | | | Gain (Loss) | | | |
| | | | | | | | | | Recognized in | | Amount of |
| | | | | | | | | | Income on | | Gain (Loss) |
| | | | | | | | | | Derivatives | | Recognized in |
| | Amount of | | Location of | | | | (Ineffective | | Income on |
| | Gain (Loss) | | Gain (Loss) | | Amount of | | Portion and | | Derivatives |
| | Recognized in | | Reclassified from | | Gain (Loss) | | Amount | | (Ineffective Portion |
| | AOCI on | | AOCI into | | Reclassified from | | Excluded from | | and Amount |
Derivatives in ASC 815 Cash Flow | | Derivatives | | Income | | AOCI into Income | | Effectiveness | | Excluded from |
Hedging Relationships | | (Effective Portion) | | (Effective Portion) | | (Effective Portion) | | Testing) | | Effectiveness Testing) |
Commodity contracts | | $ | -3,361 | | Cost of goods sold | | $ | -223 | | Cost of goods sold | | $ | -71 |
Foreign exchange contracts | | | 755 | | Net sales | | | 653 | | Net sales | | | — |
Foreign exchange contracts | | | 7,201 | | Cost of goods sold | | | -350 | | Cost of goods sold | | | — |
Total | | $ | 4,595 | | | | $ | 80 | | | | $ | -71 |
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Other Changes in Fair Value of Derivative Contracts |
For derivative instruments that are used to economically hedge the fair value of the Company’s third party and intercompany foreign currency payments, commodity purchases and interest rate payments, but are not designated as hedging instruments under ASC 815, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three month periods ended June 29, 2014 and June 30, 2013, the Company recognized the following gains (losses) on these derivative contracts: |
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| | Amount of Gain (Loss) | | | | | | | |
| | Recognized in | | Location of Gain (Loss) | | | | | |
Derivatives Not Designated as | | Income on Derivatives | | Recognized in | | | | | |
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Hedging Instruments Under ASC 815 | | 2014 | | 2013 | | Income on Derivatives | | | | | |
Commodity contracts | | $ | 53 | | $ | -197 | | Cost of goods sold | | | | | |
Foreign exchange contracts | | | -243 | | | 477 | | Other expense, net | | | | | |
Total | | $ | -190 | | $ | 280 | | | | | | | |
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During the nine month periods ended June 29, 2014 and June 30, 2013, the Company recognized the following gains (losses) on these derivative contracts: |
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| | Amount of Gain (Loss) | | | | | | | |
| | Recognized in | | Location of Gain (Loss) | | | | | |
Derivatives Not Designated as | | Income on Derivatives | | Recognized in | | | | | |
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Hedging Instruments Under ASC 815 | | 2014 | | 2013 | | Income on Derivatives | | | | | |
Commodity contracts | | $ | -8 | | $ | -197 | | Cost of goods sold | | | | | |
Foreign exchange contracts | | | 405 | | | -1,834 | | Other expense, net | | | | | |
Total | | $ | 397 | | $ | -2,031 | | | | | | | |
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Credit Risk |
The Company is exposed to the risk of default by the counterparties with which it transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. The Company monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial institution counterparties. The Company considers these exposures when measuring its credit reserve on its derivative assets, which was $3 and $5 at June 29, 2014 and September 30, 2013, respectively. |
The Company’s standard contracts do not contain credit risk related contingent features whereby the Company would be required to post additional cash collateral as a result of a credit event. However, the Company is typically required to post collateral in the normal course of business to offset its liability positions. At June 29, 2014 and September 30, 2013, the Company had posted cash collateral of $0 and $450, respectively, related to such liability positions. In addition, at June 29, 2014 and September 30, 2013, the Company had no posted standby letters of credit related to such liability positions. The cash collateral is included in Current Assets—Receivables-Other within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). |
Derivative Financial Instruments |
Cash Flow Hedges |
The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to Interest expense from the underlying debt to which the swap is designated. At June 29, 2014, the Company had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at 1.36% for a notional principal amount of $300,000 through April 2017. At September 30, 2013, the Company did not have any interest rate swaps outstanding. The derivative net loss on these contracts recorded in AOCI by the Company at June 29, 2014 was $1,473, net of tax benefit of $0. At June 29, 2014, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,416, net of tax. |
The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Mexican Pesos, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold. At June 29, 2014, the Company had a series of foreign exchange derivative contracts outstanding through September 2015 with a contract value of $221,513. The derivative net loss on these contracts recorded in AOCI by the Company at June 29, 2014 was $3,524, net of tax benefit of $1,029. At June 29, 2014, the portion of derivative net loss estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $3,331, net of tax. |
The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. The Company hedges a portion of the risk associated with the purchase of these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At June 29, 2014, the Company had a series of zinc swap contracts outstanding through June 2015 for 5 tons with a contract value of $9,851. At June 29, 2014, the Company had a series of brass swap contracts outstanding through June 2015 for 1 ton with a contract value of $3,853. The derivative net gain on these contracts recorded in AOCI by the Company at June 29, 2014 was $1,154, net of tax expense of $149. At June 29, 2014, the portion of derivative net gain estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,154, net of tax. |
Derivative Contracts |
The Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Canadian Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At June 29, 2014 and September 30, 2013, the Company had $154,263 and $108,480, respectively, of notional value of such foreign exchange derivative contracts outstanding. |
The Company periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the hedge contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the hedges. The swaps effectively fix the floating price on a specified quantity of silver through a specified date. At June 29, 2014, the Company had a series of such swap contracts outstanding through September 2015 for 35 troy ounces with a contract value of $741. At September 30, 2013, the Company had a series of such swap contracts outstanding through April 2014 for 45 troy ounces with a contract value of $980. |
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