Quarterly report pursuant to Section 13 or 15(d)

Derivatives and Fair Value Measurements

v2.4.0.8
Derivatives and Fair Value Measurements
6 Months Ended
Mar. 29, 2014
Fair Value Disclosures [Abstract]  
Derivatives and Fair Value Measurements
Derivatives and Fair Value Measurements
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes.
 
Effective Date
 
Notational
Amount
 
Fixed LIBOR Rate
 
Maturity Date
Interest Rate Swap
September 9, 2013
 
$15 million
 
1.1700
%
 
September 9, 2016
Interest Rate Swap
September 9, 2013
 
$15 million
 
1.6480
%
 
September 11, 2017
Interest Rate Swap
September 19, 2013
 
$15 million
 
1.0030
%
 
September 19, 2016
Interest Rate Swap
September 19, 2013
 
$15 million
 
1.4490
%
 
September 19, 2017
Interest Rate Swap
September 1, 2011
 
$10 million
 
1.0700
%
 
September 1, 2014


From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations. The fair value of the cotton option contracts is included in the prepaid and other current assets line item on our Condensed Consolidated Balance Sheets.
FASB Codification No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.
Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
The following financial assets (liabilities) are measured at fair value on a recurring basis (in thousands):
 
Fair Value Measurements Using
Period Ended
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Interest Rate Swaps
 
 
 
 
 
 
 
March 29, 2014
$
(641
)
 

 
$
(641
)
 

September 28, 2013
$
(906
)
 

 
$
(906
)
 

 
 
 
 
 
 
 
 
Cotton Options
 
 
 
 
 
 
 
March 29, 2014
$
652

 
$
652

 

 

September 28, 2013

 

 

 

 
 
 
 
 
 
 
 
Contingent Consideration
 
 
 
 
 
 
 
March 29, 2014
$
(3,525
)
 

 

 
$
(3,525
)
September 28, 2013
$
(3,400
)
 

 

 
$
(3,400
)

The fair value of the interest rate swap agreements were derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy.
The fair value of the cotton option contracts were established based on the daily mark for identical assets on the open market as of the close of business on March 28, 2014, the last business day prior to our quarter ended March 29, 2014, which fall in Level 1 of the fair value hierarchy.
The Salt Life Acquisition included contingent consideration payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are met during the 2019 calendar year.  We used the historical results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the contingent consideration for Salt Life at acquisition, as well as to remeasure the contingent consideration related to the acquisitions of Salt Life and Art Gun at each reporting period.  Accordingly, the fair value measurement for contingent consideration falls in Level 3 of the fair value hierarchy. 
During the three and six months ended March 29, 2014, we expensed $0.1 million related to the change in fair value of the contingent consideration associated with the Salt Life Acquisition as a result of the passage of time. At March 29, 2014, we had $3.5 million accrued in contingent consideration related to the Salt Life Acquisition. Contingent consideration related to the acquisition of Art Gun remains de minimis.
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivatives related to our interest swap agreements as of March 29, 2014, and June 29, 2013.
 
March 29,
2014
 
September 28,
2013
Accrued expenses
$
(36
)
 
$
(100
)
Deferred tax liabilities
247

 
349

Other liabilities
(605
)
 
(806
)
Accumulated other comprehensive loss
$
(394
)
 
$
(557
)


Assets Measured at Fair Value on a Non-Recurring Basis
Intangible assets acquired in connection with the Salt Life Acquisition are identified by type in Note D—Salt Life Acquisition and have been valued on a preliminary basis. These preliminary valuations included significant unobservable inputs (Level 3).