Annual report pursuant to Section 13 and 15(d)

Financial Instruments And Risk Management

v2.4.0.6
Financial Instruments And Risk Management
 12 Months Ended
Dec. 31, 2011
Financial Instruments And Risk Management [Abstract]  
Financial Instruments And Risk Management

NOTE 19—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 financial markets, primarily currency 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 mitigate them. The Company does not engage in speculative trading in any financial market.

 

The Company actively manages the risk of 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 by using currency forward and European-style option contracts formally designated and effective as cash flow hedges. 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. Hedge ineffectiveness was not material during the years ended December 31, 2011, 2010 and 2009.

 

The Company also uses currency forward and option contracts not formally designated as hedges to manage the currency exchange rate risk associated with the remeasurement of non-functional monetary assets and liabilities. Non-functional monetary assets and liabilities consist primarily of cash, intercompany loans and payables.

 

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

 

     December 31,  
     2011      2010  

Derivative instruments designated as cash flow hedges:

      

Currency forward contracts

    $ 144,000       $ 86,260   

Currency option contracts

      —           4,500   

Derivative instruments not designated as hedges:

      

Currency forward contracts

      138,807         179,382   

 

At December 31, 2011, approximately $6,074,000 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 December 31, 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. 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 $3,000,000 at December 31, 2011. The majority of the Company's derivative counterparties have strong credit ratings and, as a result, the Company does not require collateral to facilitate transactions. The Company does not hold derivatives featuring credit-related contingent terms. In addition, the Company is not a party to any derivative master agreement featuring credit-related contingent terms. Finally, the Company 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

    December 31,  
        2011      2010  

Derivative instruments designated as cash flow hedges:

         

Derivative instruments in asset positions:

         

Currency forward contracts

    Prepaid expenses and other current assets    $ 6,591       $ 362   

Currency forward contracts

    Other non-current assets      1,117         —     

Currency option contracts

    Prepaid expenses and other current assets      —           15   

Derivative instruments in liability positions:

         

Currency forward contracts

    Accrued liabilities      824         2,732   

Currency forward contracts

    Other long-term liabilities      91         —     

Currency option contracts

    Accrued liabilities      —           102   

 

    

Balance Sheet Classification

    December 31,  
         2011      2010  

Derivative instruments not designated as hedges:

         

Derivative instruments in asset positions:

         

Currency forward contracts

    Prepaid expenses and other current assets    $ 645       $ 789   

Derivative instruments in liability positions:

         

Currency forward contracts

    Accrued liabilities      2,962         4,169   

 

The following table presents the effect and classification of derivative instruments for the years ended December 31, 2011 and 2010 (in thousands):

 

    

Statement Of Operations Classification

    For the Year Ended
December 31,		  
         2011     2010     2009  

Currency Forward Contracts:

          

Derivative instruments designated as cash flow hedges:

          

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

    —      $ 3,489      $ 1,167      $ (3,024 ) 

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

    Cost of sales      (6,862 )      1,789        (740 ) 

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

    Cost of sales      (1,889 )      (230 )      (14 ) 

Derivative instruments not designated as hedges:

          

Loss recognized in income

    Cost of sales      —          (130 )      (130 ) 

Gain (Loss) recognized in income

    SG&A      1,216        (54 )      —