Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2011
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities
10. Derivative Instruments and Hedging Activities
Interest Rate Risk Management
The Company engages in an interest rate hedging strategy for which the hedged transactions are forecasted interest payments on the Company’s New Credit Facility, which is a variable rate credit facility. The hedged risk is the variability of forecasted interest rate cash flows, where the hedging strategy involves the purchase of interest rate swaps. For the outstanding cash flow hedges on interest rate exposures at September 30, 2011, the Company is hedging certain of its monthly interest rate exposures over approximately one year and ten months.
During August 2009, the Company entered into four interest rate swap agreements with an effective date of December 31, 2009. The agreements collectively provide for the Company to pay interest for less than a four-year period at a weighted average fixed rate of 2.78% on notional amounts aggregating to $140.0 million while receiving interest for the same period at the one month LIBOR rate on the same notional amounts. These agreements will expire in July 2013. These swaps at inception were designated as cash flow hedges against the variability in the LIBOR interest rate on the Company’s term loan under the Prior Credit Facility or against the variability in the LIBOR interest rate on the replacement debt. The Company’s term loan under the Prior Credit Facility was terminated in March 2011 and refinanced with the New Credit Facility as discussed further in Note 4, Long-Term Debt. The Company’s swaps remain effective and continue to be designated as cash flow hedges against the variability in certain LIBOR interest rate borrowings under the New Credit Facility at LIBOR plus 1.50% to 2.50%, fixing the Company’s weighted average effective rate on the notional amounts at 4.28% to 5.28%. There was no hedge ineffectiveness recorded as result of this refinancing event.
The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and nine months ended September 30, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of September 30, 2011. Consequently, all changes in the fair value of the derivatives are deferred and recorded in other comprehensive income (loss) until the related forecasted transactions are recognized in the consolidated statements of income. The fair value of the interest rate swap agreements are based on third-party bank quotes. At September 30, 2011 and December 31, 2010, the Company recorded the interest rate swaps as liabilities at their fair value of $6.0 million and $6.6 million, respectively.
Foreign Currency Instruments
The Company also designates certain foreign currency derivatives, such as certain foreign currency forward and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general and administrative expenses in the Company’s consolidated statements of income. The Company uses foreign currency forward contracts to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The Company also uses foreign currency option contracts to partially mitigate the impact of foreign currency fluctuations. The fair value of the forward and option contracts are based on third-party bank quotes.
The Company designates as cash-flow hedges those foreign currency forward contracts it entered into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in cost of sales in the consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.
As of September 30, 2011, and December 31, 2010, the aggregate notional amounts of cash-flow designated hedge foreign currency contracts outstanding were approximately $41.2 million and $32.1 million, respectively. At September 30, 2011, these outstanding contracts were expected to mature over the next twelve months. The Company’s derivative financial instruments are recorded on the consolidated balance sheet at fair value based on third-party bank quotes. As of September 30, 2011, the Company recorded assets at fair value of $2.1 million and liabilities at fair value of $0.2 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2010, the Company recorded assets at fair value of $0.6 million and liabilities at fair value of $0.8 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three and nine months ended September 30, 2011 and 2010, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of September 30, 2011.
As of September 30, 2011, and December 31, 2010, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month and three months, respectively. There were no foreign currency option contracts outstanding as of September 30, 2011, and December 31, 2010. See Part I, Item 3 — Quantitative and Qualitative Disclosures About Market Risk in this Quarterly Report on Form 10-Q for foreign currency instruments outstanding as of September 30, 2011.
Gains and Losses on Derivative Instruments
The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the three and nine months ended September 30, 2011 and 2010:
                                 
    Amount of Gain (Loss) Recognized  
    in Other Comprehensive Income (Loss)  
    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2011     September 30, 2010     September 30, 2011     September 30, 2010  
    (In millions)  
Derivatives designated as hedging instruments:
                               
Foreign exchange currency contracts relating to inventory and intercompany management fee hedges
  $ 3.5     $ (8.1 )   $ 1.0     $ 5.3  
Interest rate swaps
  $ (0.7 )   $ (2.4 )   $ (2.2 )   $ (8.2 )
The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three and nine months ended September 30, 2011 and 2010:
                                   
      Amount of Gain (Loss)
    Location of Gain   Recognized in Income
    (Loss)   For the Three Months Ended   For the Nine Months Ended  
    Recognized in Income   September 30, 2011     September 30, 2010   September 30, 2011     September 30, 2010  
    (In millions)
Derivatives designated as hedging instruments:
                                 
Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)
  Selling, general and administrative expenses   $ (0.3 )   $ 0.1   $ (0.3 )   $ —  
Derivatives not designated as hedging instruments:
                                 
Foreign exchange currency contracts
  Selling, general and administrative expenses   $ 2.7     $ 2.0   $ 3.8     $ (7.3 )
 
     
(1)  
For foreign exchange contracts designated as hedging instruments, the amounts recognized in income (loss) represent the amounts excluded from the assessment of hedge effectiveness. There were no ineffective amounts recorded for derivatives designated as hedging instruments.
The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three and nine months ended September 30, 2011 and 2010:
                                     
    Location of Gain                                
    (Loss)   Amount of Gain (Loss) Reclassified  
    Reclassified   from Accumulated  
    from Accumulated   Other Comprehensive  
    Other Comprehensive   Loss into Income  
    Loss into Income   For the Three Months Ended     For the Nine Months Ended  
    (Effective Portion)   September 30, 2011     September 30, 2010     September 30, 2011     September 30, 2010  
    (In millions)  
Derivatives designated as hedging instruments:
                                   
Foreign exchange currency contracts relating to inventory hedges
  Cost of sales   $ —     $ 1.1     $ (0.3 )   $ 0.4  
Foreign exchange currency contracts relating to intercompany management fee hedges
  Selling, general and administrative expenses   $ (0.7 )   $ 1.9     $ (2.2 )   $ 6.5  
Interest rate contracts
  Interest expense, net   $ (0.9 )   $ (0.9 )   $ (2.7 )   $ (2.7 )
The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheet. See Note 13, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheet location as of September 30, 2011, and December 31, 2010.