Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments And Risk Management

v2.4.0.6
Financial Instruments And Risk Management
 9 Months Ended
Sep. 30, 2012
Derivative Instruments and Hedges, Assets [Abstract]  
Financial Instruments And Risk Management
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 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. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2012 and 2011.
 
The Company also uses currency forward 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 and cash equivalents, short-term investments, payables and intercompany loans.
The following table presents the gross notional amount of outstanding derivative instruments (in thousands): 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
97,925

 
$
144,000

 
$
156,025

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
89,462

 
138,807

 
63,210


At September 30, 2012, approximately $3,575,000 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, 2012, the Company’s derivative contracts had a remaining maturity of approximately one year or less. All the counterparties to these transactions had both long-term and short-term investment grade credit ratings and as a result, the Company does not require 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, 2012. 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
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
2,170

 
$
6,591

 
$
7,449

Currency forward contracts
 
Other non-current assets
 
—

 
1,117

 
—

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
580

 
824

 
1,124

Currency forward contracts
 
Other long-term liabilities
 
—

 
91

 
—

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
582

 
$
645

 
$
908

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
1,640

 
2,962

 
1,461


The following table presents the effect and classification of derivative instruments (in thousands):
 
 
Statement of
Operations
Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2012
 
2011
 
2012
 
2011
Currency Forward Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income or loss
 
—
 
$
(736
)
 
$
7,973

 
$
(143
)
 
$
2,379

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
3,219

 
(4,568
)
 
4,011

 
(5,436
)
Gain reclassified from accumulated other comprehensive income or loss to income as a result of cash flow hedge discontinuance
 
Cost of sales
 
—

 
—

 
441

 
—

Loss recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
(12
)
 
(940
)
 
(16
)
 
(1,586
)
Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
 
Selling, general and administrative expense
 
(881
)
 
(1,541
)
 
(7,134
)
 
3,218