Supercuts 2007 Annual Report Download - page 65

During September 2006, the Company’s cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the
Company’s net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million. This cash outlay was recorded
within investing activities within the Consolidated Statement of Cash Flows. Approximately $0.1 million of tax-effected gain related to this
derivative was charged to the cumulative translation adjustment account during the twelve months ended June 30, 2007. The cumulative tax-
effected net loss recorded in accumulated other comprehensive income (AOCI) related to the cross-currency swap was $7.9 million at June 30,
2007. This amount will remain deferred within AOCI indefinitely, as the event which would trigger its release from AOCI and recognition in
earnings is the sale or liquidation of the Company’s international operations that the cross-currency swap hedged. The Company currently has
no intent to sell or liquidate this portion of its business operations.
Forward Foreign Currency Contracts:
The Company’s exposure to foreign exchange risk includes risks related to fluctuations in the Canadian dollar relative to the U.S. dollar.
The exposure to Canadian dollar exchange rates on the Company’s fiscal year 2007 cash flows primarily includes payments in Canadian
dollars from the Company’s Canadian salon operations for retail inventory exported from the United States.
The Company seeks to manage exposure to changes in the value of the Canadian dollar. In order to do so, the Company entered into
forward currency contracts during fiscal year 2007 to reduce the risk of significant negative impact on its U.S. dollar cash flows or income. The
Company does not hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency
exchange rates on net income and cash flows. Forward currency contracts to sell Canadian dollars and buy $16.4 million U.S. dollars were
outstanding as of June 30, 2007 to hedge forecasted intercompany foreign currency denominated transactions stemming from monthly product
shipments from the U.S. to Canadian salons. These contracts mature at various dates between June 2007 and May 2010. See Note 5 to the
Consolidated Financial Statements for further discussion.
On May 29, 2007, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate
$16.9 million U.S. dollars, with maturation dates between June 2007 and May 2010. The purpose of the forward contracts is to protect against
adverse movements in the Canadian dollar exchange rate. The contracts were designated and are effective as cash flow hedges of Canadian
dollar denominated forecasted intercompany transactions related to monthly product shipments from the U.S. to Canadian salons. These cash
flow hedges were recorded at fair value within accrued expenses in the Consolidated Balance Sheet, with a corresponding offset in other
comprehensive income within shareholders’ equity.
On February 1, 2006, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate
$15.8 million U.S. dollars, with maturation dates between July 2006 and May 2009. The contracts were designated and were effective as cash
flow hedges of Canadian dollar denominated forecasted intercompany transactions. These cash flow hedges were recorded at fair value within
accrued expenses in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders’ equity.
On January 3, 2007, the Company terminated its remaining Canadian forward foreign currency contracts entered into on February 1, 2006
having a $14.5 million notional amount. The termination resulted in a deferred gain of $0.4 million which is recorded in AOCI in the
Consolidated Balance Sheet. The deferred gain will be recorded into income through May 31, 2009 as the forecasted foreign currency
transactions are recognized in earnings. Approximately $0.1 million of the deferred gain was amortized against cost of sales during fiscal year
2007, resulting in a remaining deferred gain of $0.3 million in AOCI at June 30, 2007.
64