Derivatives

6 Months Ended

Jul. 01, 2011

Note 3. Derivatives

In the normal course of business, the financial position and results of operations of the Company are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as we purchase and sell goods in local currencies. We have established policies and business practices that are intended to mitigate a portion of the effect of these exposures. We use derivative financial instruments, specifically forward contracts, to manage our currency exposures. These derivative instruments are viewed as risk management tools and are not used for trading or speculative purposes. Derivatives entered into by the Company are either designated as cash flow hedges of forecasted foreign currency transactions or are undesignated economic hedges of existing intercompany assets and liabilities, certain third party assets and liabilities, and non-US dollar-denominated cash balances.

Derivative instruments expose us to credit and market risk. The market risk associated with these instruments resulting from currency exchange movements is expected to offset the market risk of the underlying transactions being hedged. We do not believe there is a significant risk of loss in the event of non-performance by the counterparties associated with these instruments because these transactions are executed with a group of major financial institutions and have varying maturities through January 2013. As a matter of policy, we enter into these contracts only with counterparties having a minimum investment-grade or better credit rating. Credit risk is managed through the continuous monitoring of exposures to such counterparties.

Cash Flow Hedges

The Company principally uses foreign currency forward contracts as cash flow hedges to offset a portion of the effects of exchange rate fluctuations on certain of its forecasted foreign currency denominated sales transactions. The Company’s cash flow exposures include anticipated foreign currency transactions, such as foreign currency denominated sales, costs, expenses and inter-company charges, as well as collections and payments. The risk in these exposures is the potential for losses associated with the remeasurement of non-functional currency cash flows into the functional currency. The Company has a hedging program to aid in mitigating its foreign currency exposures and to decrease the volatility in earnings. Under this hedging program, the Company performs a quarterly assessment of the effectiveness of the hedge relationship and measures and recognizes any hedge ineffectiveness in earnings. A hedge is effective if the changes in the fair value of the derivative provide offset of at least 80 percent and not more than 125 percent of the changes in the fair value or cash flows of the hedged item attributable to the risk being hedged. The Company uses regression analysis to assess the effectiveness of a hedge relationship.

Forward contracts designated as cash flow hedging instruments are recorded in our unaudited condensed consolidated balance sheets at fair value. The effective portion of gains and losses resulting from changes in the fair value of these hedge instruments are deferred in accumulated other comprehensive income (“OCI”) and reclassified to earnings, in cost of goods sold, in the period that the hedged transaction is recognized in earnings. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows. Hedge ineffectiveness is evaluated using the hypothetical derivative method, and the ineffective portion of the hedge is reported in our unaudited condensed consolidated statements of operations in other, net. The amount of hedge ineffectiveness reported in other, net for the quarters ended July 1, 2011 and July 2, 2010 was not material.

The notional value of foreign currency forward sell contracts entered into as cash flow hedges is as follows:


	Notional Amount
Currency	July 1, 2011		December 31, 2010		July 2, 2010
Pound Sterling		$33,161		$23,536		$22,814
Euro		135,140		88,414		70,080
Japanese Yen		30,063		22,817		16,856

Total		$198,364		$134,767		$109,750

Latest Maturity Date	January 2013		January 2012		April 2011

Other Derivative Contracts

We also enter into derivative contracts to manage foreign currency exchange risk on intercompany accounts receivable and payable, third-party accounts receivable and payable, and non-U.S. dollar-denominated cash balances using forward contracts. These forward contracts, which are undesignated hedges of economic risk, are recorded at fair value on the unaudited condensed consolidated balance sheets, with changes in the fair value of these instruments recognized in earnings immediately. The gains or losses related to the contracts largely offset the remeasurement of those assets and liabilities. Cash flows associated with these contracts are classified as operating cash flows in the unaudited condensed consolidated statements of cash flows.

The notional value of foreign currency forward (buy) and sell contracts entered into to mitigate the foreign currency risk associated with certain balance sheet items is as follows (the contract amount represents the net amount of all purchase and sale contracts of a foreign currency):


	Notional Amount
Currency	July 1, 2011			December 31, 2010			July 2, 2010
Pound Sterling		$14,396			$9,312			$(18,221	)
Euro		5,798			8,913			(6,558	)
Japanese Yen		17,339			28,680			7,309
Canadian Dollar		4,871			6,013			4,855
Norwegian Kroner		3,657			2,219			2,711
Swedish Krona		3,470			2,601			1,970

Total		$49,531			$57,738			$(7,934	)

Sell Contracts		$68,725			$71,799			$38,496
Buy Contracts		(19,194	)		(14,061	)		(46,430	)

Total Contracts		$49,531			$57,738			$(7,934	)

Latest Maturity Date	October 2011			April 2011			October 2010

Fair Value of Derivative Instruments

The following table summarizes the fair values and presentation in the unaudited condensed consolidated balance sheets for derivatives, which consist of foreign exchange forward contracts, as of July 1, 2011, December 31, 2010 and July 2, 2010:


	Asset Derivatives						Liability Derivatives
	Fair Value						Fair Value
Balance Sheet Location	July 1, 2011		December 31, 2010		July 2, 2010		July 1, 2011		December 31, 2010		July 2, 2010

Derivatives designated as hedge instruments:

Derivative assets	$	-	$	-	$	8,437	$	-	$	-	$	679
Derivative liabilities		242		1,693		45		6,962		3,284		57
Other assets, net		164		6		-		70		5		-
Other long-term liabilities		96		67		-		167		178		-

	$	502	$	1,766	$	8,482	$	7,199	$	3,467	$	736


Derivatives not designated as hedge instruments:

Derivative assets	$	74	$	29	$	124	$	24	$	-	$	-
Derivative liabilities		10		6		6		159		105		85

	$	84	$	35	$	130	$	183	$	105	$	85


Total derivatives	$	586	$	1,801	$	8,612	$	7,382	$	3,572	$	821

The Effect of Derivative Instruments on the Statements of Operations for the Quarters Ended July 1, 2011 and July 2, 2010

Amount of Gain/(Loss)

Location of Gain/(Loss)

Reclassified from

Recognized in OCI on

Reclassified from

Accumulated OCI into

Derivatives in

Derivatives

Accumulated OCI into

Income

Cash Flow

(Effective Portion)

Income

(Effective Portion)

Hedging Relationships

2011

2010

(Effective Portion)

2011

2010

Foreign exchange forward contracts

$(3,319

)

$2,812

⁽¹⁾

Cost of goods sold

$(583

)

$273

⁽¹⁾Amount reported in the prior year of $7,358 was decreased by $4,546 in the current year to $2,812. This amount represents the gain on derivatives recognized in other comprehensive income during the period and was changed to conform to the current period presentation.

The Company expects to reclassify pre-tax losses of $6,717 to the income statement within the next twelve months.

Amount of Gain/(Loss)

Recognized in

Derivatives not Designated

Location of Gain/(Loss)Recognized

Income on Derivatives

as Hedging Instruments

In Income on Derivatives

2011

2010

Foreign exchange forward contracts

Other, net

$(809

)

$1,545

The Effect of Derivative Instruments on the Statements of Operations for the Six Months Ended July 1, 2011 and July 2, 2010

Amount of Gain/(Loss)

Location of Gain/(Loss)

Reclassified from

Recognized in OCI on

Reclassified from

Accumulated OCI into

Derivatives in

Derivatives

Accumulated OCI into

Income

Cash Flow

(Effective Portion)

Income

(Effective Portion)

Hedging Relationships

2011

2010

(Effective Portion)

2011

2010

Foreign exchange forward contracts

$(8,625

)

$8,412

⁽¹⁾

Cost of goods sold

$(3,631

)

$1,606

⁽¹⁾Amount reported in the prior year of $7,358 was increased by $1,054 in the current year to $8,412. This amount represents the gain on derivatives recognized in other comprehensive income during the period and was changed to conform to the current period presentation.

Amount of Gain/(Loss)

Recognized in

Derivatives not Designated

Location of Gain/(Loss)Recognized

Income on Derivatives

as Hedging Instruments

In Income on Derivatives

2011

2010

Foreign exchange forward contracts

Other, net

$(764

)

$(622

)

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

+ References

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-Name Statement of Financial Accounting Standard (FAS)
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+ Details

TIMBERLAND CO 10-Q