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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Note 9: Derivatives
The Company is exposed to foreign currency exchange rate risk inherent in forecasted sales, cost of sales,
and assets and liabilities denominated in currencies other than the U.S. dollar. The Company is also exposed
to interest rate risk inherent in its debt and investment portfolios. The Company's risk management strategy
provides for the use of derivative Ñnancial instruments, including foreign exchange forward contracts, to hedge
certain foreign currency exposures. The Company's intent is to oÅset gains and losses that occur on the
underlying exposures, with gains and losses on the derivative contracts hedging these exposures. The Company
does not enter into any speculative positions with regard to derivative instruments. The Company enters into
foreign exchange contracts to hedge against exposure to changes in foreign currency exchange rates, only when
natural oÅsets cannot be achieved. Such contracts are designated at inception to the related foreign currency
exposures being hedged, which include sales by subsidiaries, and assets and liabilities that are denominated in
currencies other than the U.S. dollar. The Company's foreign currency hedges generally mature within three
months.
All derivatives are recorded at fair market value on the balance sheet, classiÑed in other assets. For
derivative instruments that are designated and qualify as cash Öow hedges, the eÅective portion of the gain or
loss on the derivative instrument is recorded in accumulated other comprehensive income as a separate
component of stockholders' equity and reclassiÑed into earnings in the period during which the hedged
transaction aÅects earnings. For derivative instruments that are designated and qualify as fair value hedges,
the gain or loss on the derivative instrument, as well as the oÅsetting gain or loss on the hedged item
attributable to the hedged risk, are recognized in earnings in the current period. For derivative instruments not
designated as hedging instruments, changes in their fair values are recognized in earnings in the current
period. Subsequent to the adoption of SFAS 133, the Company has only engaged in fair value hedge
accounting pursuant to the methodology described herein.
For foreign currency forward contracts, hedge eÅectiveness is measured by comparing the cumulative
change in the hedged contract with the cumulative change in the hedged item, both of which are based on
forward rates. To the extent that the critical terms of the hedged item and the derivative are not identical,
hedge ineÅectiveness is reported in earnings immediately. The Company estimates the fair values on
derivatives based on quoted market prices or pricing models using current market rates.
The Company reports hedge ineÅectiveness from foreign currency derivatives for both options and
forward contracts in other income or expense. Hedge ineÅectiveness was not material in Ñscal 2003. The
eÅective portion of all derivatives is reported in the same Ñnancial statement line item as the changes in the
hedged item.
The Company had foreign exchange contract lines in the amount of $120.0 million at December 28, 2003.
Under these lines, the Company may enter into forward exchange contracts that require the Company to sell
or purchase foreign currencies. At December 28, 2003, the Company had no forward contracts outstanding.
At December 28, 2003, the Company had $11.7 million in Japanese Yen-denominated accounts payable
designated as cash Öow hedges against Japanese Yen-denominated cash holdings and accounts receivable. The
Company had no outstanding hedge contracts. There were no unrealized gains or losses on derivative
instruments as of December 28, 2003. At December 29, 2002, the Company had $20.2 million in Japanese
Yen-denominated accounts payable designated as cash Öow hedges against Japanese Yen-denominated cash
holdings and accounts receivable. The Company had no outstanding hedge contracts. There were no
unrealized gains or losses on derivative instruments as of December 29, 2002.
The impact of movements in currency exchange rates on foreign exchange contracts substantially
mitigates the related impact on the underlying items hedged. The Company had net transaction gains (losses)
of approximately ($1,345,000), ($517,000), and ($894,000), for the years ended December 28, 2003,
December 29, 2002, and December 30, 2001, respectively. These amounts are included in other income
(loss), net, in the statement of operations.
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