Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments And Risk Management

v2.3.0.15
Financial Instruments And Risk Management
 9 Months Ended
Sep. 30, 2011
Financial Instruments And Risk Management [Abstract]  
Financial Instruments And Risk Management

NOTE 10 – FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

In the normal course of business, the Company's financial position and results of operations are routinely subject to a variety of risks. These risks include risks associated with global financial and capital markets, primarily exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to result in an appropriate level of protection against an adverse effect of these risks. The Company does not engage in speculative trading in any capital market.

The Company's primary exchange rate risk management objective is to mitigate the uncertainty of anticipated functional currency equivalent cash flows attributable to changes in exchange rates. The Company primarily focuses on mitigating changes in functional currency equivalent cash flows resulting from anticipated U.S. dollar denominated inventory purchases by subsidiaries that use European euros, Canadian dollars, Japanese yen or Korean won as their functional currency. The Company manages this risk primarily by using currency forward and option contracts. If the anticipated transactions are deemed probable, the resulting relationships are formally designated as cash flow hedges. The Company also uses foreign currency forward and option contracts to hedge net balance sheet exposures related primarily to intercompany loan agreements and payables.

The effective change in fair value of financial instruments formally designated in cash flow hedging relationships is initially offset to accumulated other comprehensive income and any ineffective portion is offset to current income. Amounts accumulated in other comprehensive income are subsequently reclassified to cost of sales when the underlying transaction is included in income. Hedge effectiveness is determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, the change in fair value attributable to changes in forward points are excluded from the determination of hedge effectiveness and included in current cost of sales. For option contracts, the hedging relationship is assumed to have no ineffectiveness if the critical terms of the option contract match the hedged transaction's terms, the strike price, or prices, match the specified levels beyond or within that of the exposure being hedged, the option's cash flows completely offset the hedged item's cash flow at maturity and the option can only be exercised on a specified date. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2011 and 2010.

The classification in the Condensed Consolidated Statements of Operations of effective hedge results is the same as that of the underlying exposure. Results of hedges of product costs are recorded in cost of sales when the underlying hedged transaction affects income. Unrealized derivative gains and losses, which are recorded in current assets and liabilities, respectively, are non-cash items and therefore are taken into account in the preparation of the Condensed Consolidated Statements of Cash Flows based on their respective balance sheet classifications.

The Company uses derivative instruments not formally designated as hedges to manage the exchange rate risk associated with both the remeasurement of monetary assets and liabilities and anticipated transactions that do not qualify as the hedged items in cash flow hedging relationships. The change in fair value of these instruments is recognized in the current period in selling, general and administrative expense ("SG&A"), depending on the underlying exposure.

 

The following table presents the gross notional amount of outstanding derivative instruments (in thousands):

 

     September 30,
2011		      December 31,
2010		      September 30,
2010 		 

Derivative instruments designated as cash flow hedges:

         

Currency forward contracts

    $ 156,025       $ 86,260       $ 86,725   

Currency option contracts

      —           4,500         9,000   

Derivative instruments not designated as cash flow hedges:

         

Currency forward contracts

      63,210         179,382         48,563   

At September 30, 2011, approximately $2,284,000 of deferred net gains on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the European euro, Canadian dollar, Japanese yen and Korean won when outstanding derivative contracts mature.

At September 30, 2011, the Company's derivative contracts had a remaining maturity of approximately two years or less. All the counterparties to these transactions had both long-term and short-term investment grade credit ratings and, as a result, neither the Company nor its counterparties are required to post collateral to facilitate transactions. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $2,000,000 at September 30, 2011. The Company does not hold derivatives featuring credit-related contingent terms, is not a party to any derivative master agreement featuring credit-related contingent terms and has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.

The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):

 

    

Balance Sheet Classification

    September 30,
2011		      December 31,
2010		      September 30,
2010 		 

Derivative instruments designated as cash flow hedges:

            

Derivative instruments in asset positions:

            

Currency forward contracts

    Prepaid expenses and other current assets    $ 7,449       $ 362       $ 787   

Currency option contracts

    Prepaid expenses and other current assets      —           15         45   

Derivative instruments in liability positions:

            

Currency forward contracts

    Accrued liabilities      1,124         2,732         2,618   

Currency option contracts

    Accrued liabilities      —           102         269   

 

    

Balance Sheet Classification

    September 30,
2011		      December 31,
2010		      September 30,
2010 		 

Derivative instruments not designated as cash flow hedges:

            

Derivative instruments in asset positions:

            

Currency forward contracts

    Prepaid expenses and other current assets    $ 908       $ 789       $ —     

Derivative instruments in liability positions:

            

Currency forward contracts

    Accrued liabilities      1,461         4,169         416   

 

The following table presents the effect and classification of derivative instruments (in thousands):

 

          Three Months Ended
September 30,		     Nine Months  Ended
September 30, 		 
     Statement Of
Operations
Classification 		   2011     2010     2011     2010  

Currency Forward Contracts:

            

Derivative instruments designated as cash flow hedges:

            

Gain (Loss) recognized in other comprehensive income, net of tax

    —      $ 7,973      $ (4,082 )    $ 2,379      $ 1,072   

Gain (Loss) reclassified from accumulated other comprehensive income to income for the effective portion

    Cost of sales      (4,568 )      2,054        (5,436 )      614   

Gain (Loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion

    Cost of sales      (940 )      95        (1,586 )      (1 ) 

Derivative instruments not designated as cash flow hedges:

            

Loss recognized in income

    Cost of Sales      —          (1,078 )      —          (7 ) 

Gain (Loss) recognized in income

    SG&A      (1,541 )      (2,274 )      3,218        2,040