DERIVATIVES AND FAIR VALUE MEASUREMENTS | 6 Months Ended |
Sep. 28, 2013 |
Derivatives and Fair Value Measurements [Abstract] | |
DERIVATIVES AND FAIR VALUE MEASUREMENTS | DERIVATIVES AND FAIR VALUE MEASUREMENTS |
We manufacture, market and sell our products globally. For the six months ended September 28, 2013, approximately 45.6% of our sales were generated outside the U.S. generally in local currencies. We also incur certain manufacturing, marketing and selling costs in international markets in local currency. |
Accordingly, our earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. Dollar, our reporting currency. We have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. That program includes the use of derivative financial instruments to minimize for a period of time, the unforeseen impact on our financial results from changes in foreign exchange rates. We utilize foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, primarily the Japanese Yen and the Euro, and to a lesser extent the Swiss Franc, British Pound Sterling, Australian Dollar, Canadian Dollar and the Mexican Peso. This does not eliminate the volatility of foreign exchange rates, but because we generally enter into forward contracts one year out, rates are fixed for a one-year period, thereby facilitating financial planning and resource allocation. |
|
Designated Foreign Currency Hedge Contracts |
|
All of our designated foreign currency hedge contracts as of September 28, 2013 and March 30, 2013 were cash flow hedges under ASC Topic 815, Derivatives and Hedging. We record the effective portion of any change in the fair value of designated foreign currency hedge contracts in Other Comprehensive Income until the related third-party transaction occurs. Once the related third-party transaction occurs, we reclassify the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, we would reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. We had designated foreign currency hedge contracts outstanding in the contract amount of $126.8 million as of September 28, 2013 and $133.3 million as of March 30, 2013. |
|
During the six months ended September 28, 2013, a $1.7 million gain related to foreign exchange hedge contracts, net of tax, was recorded in Accumulated Other Comprehensive Income to recognize the effective portion of the fair value of any designated foreign currency hedge contracts that are, or previously were, designated as foreign currency cash flow hedges, as compared to net losses of $3.0 million, net of tax, for the six months ended September 29, 2012. At September 28, 2013, gains of $1.7 million, net of tax, may be reclassified to earnings within the next twelve months. All currency cash flow hedges outstanding as of September 28, 2013 mature within twelve months. |
|
Non-designated Foreign Currency Contracts |
|
We manage our exposure to changes in foreign currency on a consolidated basis to take advantage of offsetting transactions and balances. We use foreign currency forward contracts as a part of our strategy to manage exposure related to foreign currency denominated monetary assets and liabilities. These foreign currency forward contracts are entered into for periods consistent with currency transaction exposures, generally one month. They are not designated as cash flow or fair value hedges under ASC Topic 815. These forward contracts are marked-to-market with changes in fair value recorded to earnings. We had non-designated foreign currency hedge contracts under ASC Topic 815 outstanding in the contract amount of $80.2 million as of September 28, 2013 and $65.6 million as of March 30, 2013. |
Interest Rate Swaps |
|
On August 1, 2012, we entered into a credit agreement which provided for a $475.0 million term loan (“Credit Agreement”). Under the terms of this Credit Agreement, we may borrow at a spread to an index, including the LIBOR index of 1-month, 3-months, 6-months, etc. From the date of the Credit Agreement, we have chosen to borrow against the 1-month USD-LIBOR-BBA rounded up, if necessary, to the nearest 1/16th of 1% (“Adjusted LIBOR”). The terms of the Credit Agreement also allow us to borrow in multiple tranches. At the end of three months ended September 28, 2013 we had three tranches outstanding, each based on Adjusted LIBOR. |
|
Accordingly, our earnings and cash flows are exposed to interest rate risk from changes in Adjusted LIBOR. Part of our interest rate risk management strategy includes the use of interest rate swaps to mitigate our exposure to changes in variable interest rates. Our objective in using interest rate swaps is to add stability to interest expense and to manage and reduce the risk inherent in interest rate fluctuations. If the interest rate swap qualifies for hedge accounting, we formally document our hedge relationships (including identifying the hedged instrument and hedged item) at hedge inception. On a quarterly basis, we assess whether the interest rate swaps are highly effective in offsetting changes in the cash flow of the hedged item. We do not hold or issue interest rate swaps for trading purposes. We manage the credit risk of the counterparties by dealing only with institutions that we consider financially sound and consider the risk of non-performance to be remote. |
On December 21, 2012, we entered into two interest rate swap agreements ("The Swaps"), whereby we receive Adjusted LIBOR and pay an average fixed rate of 0.68% on a total notional amount of $250.0 million of debt. The Swaps mature on August 1, 2017. We designated The Swaps as cash flow hedges of variable interest rate risk associated with $250.0 million of indebtedness. For the six months ended September 28, 2013, a gain of $1.6 million, net of tax, was recorded in Accumulated Other Comprehensive Income to recognize the effective portion of the fair value of interest rate swaps that qualify as cash flow hedges. |
|
|
Fair Value of Derivative Instruments |
The following table presents the effect of our derivative instruments designated as cash flow hedges and those not designated as hedging instruments under ASC Topic 815 in our consolidated statements of income and comprehensive income for the six months ended September 28, 2013. |
|
| | | | | | | | | | | | | | | | |
Derivative Instruments | | Amount of | | Amount of Gain/(Loss) Reclassified | | Location in | | Amount of Gain/(Loss) | | Location in |
Gain/(Loss) | from AOCI into | Consolidated Statements of | Excluded from | Consolidated Statements of |
Recognized | Earnings | Income and Comprehensive Income | Effectiveness | Income and Comprehensive Income |
in AOCI | (Effective Portion) | | Testing (*) | |
(Effective Portion) | | | | |
(In thousands) | | | | | | | | | | |
Designated foreign currency hedge contracts, net of tax | | $ | 1,704 | | | $ | 4,602 | | | Net revenues, COGS, and SG&A | | $ | 33 | | | Interest and other expense, net |
|
Non-designated foreign currency hedge contracts | | | | | | | | | | (906 | ) | | Interest and other expense, net |
|
Designated interest rate swaps, net of tax | | $ | 1,643 | | | $ | 577 | | | Interest and other expense, net | | $ | — | | | |
|
(*) We exclude the difference between the spot rate and hedge forward rate from our effectiveness testing. |
|
We did not have fair value hedges or net investment hedges outstanding as of September 28, 2013 or March 30, 2013. |
|
As of September 28, 2013, the amount recognized as deferred tax for designated foreign currency was $0.3 million and the amount recognized as deferred tax for interest rate swap hedges was $0.4 million. |
|
ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by ASC Topic 820, Fair Value Measurements and Disclosures, by considering the estimated amount we would receive or pay to sell or transfer these instruments at the reporting date and by taking into account current interest rates, currency exchange rates, current interest rate curves, interest rate volatilities, the creditworthiness of the counterparty for assets, and our creditworthiness for liabilities. In certain instances, we may utilize financial models to measure fair value. Generally, we use inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of September 28, 2013, we have classified our derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC Topic 815, as discussed below, because these observable inputs are available for substantially the full term of our derivative instruments. |
|
The following tables present the fair value of our derivative instruments as they appear in our consolidated balance sheets as of September 28, 2013 by type of contract and whether it is a qualifying hedge under ASC Topic 815. |
| | | | | | |
| | | | | | | | | | | | | | | | |
(In thousands) | | Location in | | September 28, 2013 | | March 30, 2013 | | | | | | |
Balance Sheet | | | | | | |
Derivative Assets: | | | | | | | | | | | | |
Designated foreign currency hedge contracts | | Other current assets | | $ | 3,359 | | | $ | 7,030 | | | | | | | |
| | | | | |
Designated interest rate swaps | | Other current assets | | 1,069 | | | — | | | | | | | |
| | | | | |
| | | | $ | 4,428 | | | $ | 7,030 | | | | | | | |
| | | | | |
Derivative Liabilities: | | | | | | | | | | | | |
Designated foreign currency hedge contracts | | Other current liabilities | | $ | 1,436 | | | $ | 954 | | | | | | | |
| | | | | |
Designated interest rate swaps | | Other current liabilities | | — | | | 671 | | | | | | | |
| | | | | |
| | | | $ | 1,436 | | | $ | 1,625 | | | | | | | |
| | | | | |
Other Fair Value Measurements |
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. ASC Topic 820 does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. In accordance with ASC Topic 820, for the six months ended September 28, 2013, we applied the requirements under ASC Topic 820 to our non-financial assets and non-financial liabilities. As we did not have an impairment of any non-financial assets or non-financial liabilities, there was no disclosure required relating to our non-financial assets or non-financial liabilities. |
On a recurring basis, we measure certain financial assets and financial liabilities at fair value, including our money market funds, foreign currency hedge contracts, and contingent consideration. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We base fair value upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. |
ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows: |
| | | | | | | | | | | | | | | | |
• | Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities. | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
• | Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
• | Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. | | | | | | | | | | | | | | | |
Our money market funds carried at fair value are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. |
Fair Value Measured on a Recurring Basis |
Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of September 28, 2013: |
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Quoted Market | | Significant | | Significant | | Total |
Prices for | Other | Unobservable |
Identical Assets | Observable | Inputs |
(Level 1) | Inputs | (Level 3) |
| (Level 2) | |
Assets | | | | | | | | |
Money market funds | | $ | 93,486 | | | $ | — | | | $ | — | | | $ | 93,486 | |
|
Designated foreign currency hedge contracts | | — | | | 3,359 | | | — | | | 3,359 | |
|
Designated interest rate swap | | — | | | 1,069 | | | — | | | 1,069 | |
|
| | $ | 93,486 | | | $ | 4,428 | | | $ | — | | | $ | 97,914 | |
|
Liabilities | | | | | | | | |
Designated foreign currency hedge contracts | | $ | — | | | $ | 1,436 | | | $ | — | | | $ | 1,436 | |
|
Contingent consideration | | — | | | — | | | 6,910 | | | 6,910 | |
|
| | $ | — | | | $ | 1,436 | | | $ | 6,910 | | | $ | 8,346 | |
|
A description of the methods used to determine the fair value of the Level 3 liabilities is included within Note 3, Acquisitions. The table below provides a reconciliation of the beginning and ending Level 3 liabilities for the quarter ended September 28, 2013. |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(In thousands) | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Beginning balance | | $ | 6,600 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Contingent consideration interest expense | | 310 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Ending balance | | $ | 6,910 | | | | | | | | | | | | | |
| | | | | | | | | | | |
|
Other Fair Value Disclosures |
The Term Loan which is carried at amortized cost and accounts receivable and accounts payable approximate fair value. |