Financial Instruments, Derivatives and Hedging Transactions

9 Months Ended

Sep. 30, 2011

Financial Instruments, Derivatives and Hedging Transactions [Abstract]

Financial Instruments, Derivatives and Hedging Transactions

7. Financial Instruments, Derivatives and Hedging Transactions

Financial Instruments

The carrying amount of cash equivalents and restricted cash approximates fair value because of the short maturity of those instruments. The fair value of investments in available-for-sale securities and supplemental retirement plan assets is based on market quotations. In determining the fair value of the Company’s foreign currency derivatives, the Company uses the income approach employing market observable inputs (Level II), such as spot currency rates and discount rates.

Foreign Currency

In the normal course of business, we are subject to the risks associated with fluctuations in foreign currency exchange rates. To limit this foreign exchange rate exposure, the Company seeks to denominate its contracts in U.S. dollars. If we are unable to enter into a contract in U.S. dollars, we review our foreign exchange exposure and, where appropriate, derivatives are used to minimize the risk of foreign exchange rate fluctuations to operating results and cash flows. We do not use derivative instruments for trading or speculative purposes.

As of September 30, 2011, SS/L had the following amounts denominated in Japanese yen and euros (which have been translated into U.S. dollars based on the September 30, 2011 exchange rates) that were unhedged:

	Foreign
	Currency		U.S. $
	(In thousands)
Future revenues — Japanese yen	¥	63,822	$	831
Future expenditures — Japanese yen	¥	2,924,095	$	38,061
Future revenue — euros	€	12,786	$	17,271
Future expenditures — euros	€	8,688	$	11,736

Derivatives and Hedging Transactions

All derivative instruments are recorded at fair value as either assets or liabilities in our condensed consolidated balance sheets. Each derivative instrument is generally designated and accounted for as either a hedge of a recognized asset or a liability (“fair value hedge”) or a hedge of a forecasted transaction (“cash flow hedge”). Certain of these derivatives are not designated as hedging instruments and are used as “economic hedges” to manage certain risks in our business.

As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The Company does not hold collateral or other security from its counterparties supporting its derivative instruments. In addition, there are no netting arrangements in place with the counterparties. To mitigate the counterparty credit risk, the company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors.

Cash Flow Hedges

The Company enters into long-term construction contracts with customers and vendors, some of which are denominated in foreign currencies. Hedges of expected foreign currency denominated contract revenues and related purchases are designated as cash flow hedges and evaluated for effectiveness at least quarterly. Effectiveness is tested using regression analysis. The effective portion of the gain or loss on a cash flow hedge is recorded as a component of other comprehensive income (“OCI”) and reclassified to income in the same period or periods in which the hedged transaction affects income. The ineffective portion of a cash flow hedge gain or loss is included in income.

In June 2010 and July 2008, SS/L was awarded satellite contracts denominated in euros and entered into a series of foreign exchange forward contracts with maturities through 2013 and 2011, respectively, to hedge associated foreign currency exchange risk because our costs are denominated principally in U.S. dollars. These foreign exchange forward contracts have been designated as cash flow hedges of future euro denominated receivables.

The maturity of foreign currency exchange contracts held as of September 30, 2011 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments under long-term contracts. These foreign exchange contracts mature as follows:

	To Sell
			Hedge		At
	Euro		Contract		Market
Maturity	Amount		Rate		Rate
	(In thousands)
2011	€	46,618	$	62,485	$	62,949
2012		27,000		32,649		36,357
2013		27,000		32,894		36,203
	€	100,618	$	128,028	$	135,509

	To Buy
			Hedge		At
	Euro		Contract		Market
Maturity	Amount		Rate		Rate
	(In thousands)
2011	€	4,219	$	5,748	$	5,698

Balance Sheet Classification

The following summarizes the fair values and location in our condensed consolidated balance sheet of all derivatives held by the Company as of September 30, 2011 (in thousands):

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts				Other current liabilities	$	5,576
				Other liabilities		3,553
						9,129
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets		1,730	Other current liabilities		50
				Other liabilities		82
Total derivatives		$	1,730		$	9,261

The following summarizes the fair values and location in our consolidated balance sheet of all derivatives held by the Company as of December 31, 2010 (in thousands):

	Asset Derivatives			Liability Derivatives
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	4,152	Other current liabilities	$	9,451
				Other liabilities		5,360
			4,152			14,811
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets		396	Other current liabilities		133
				Other liabilities		63
Total derivatives		$	4,548		$	15,007

Cash Flow Hedge Gains (Losses) Recognition

The following summarizes the gains (losses) recognized in the consolidated statements of operations and in accumulated other comprehensive loss for all derivatives for the three and nine months ended September 30, 2011 (in thousands):

				Loss Reclassified from				Loss on Derivative
				Accumulated				Ineffectiveness and
	Gain (Loss) Recognized			OCI into Income				Amounts Excluded from
Derivatives in Cash Flow	in OCI on Derivatives			(Effective Portion)				Effectiveness Testing
Hedging Relationships	(Effective Portion)			Location	Amount			Location	Amount
Three months ended September 30, 2011
Foreign exchange contracts	$	4,988		Revenue	$	(6,785	)	Revenue	$	(1,140	)
								Interest income	$	—
Nine months ended September 30, 2011
Foreign exchange contracts	$	(10,553	)	Revenue	$	(12,966	)	Revenue	$	(66	)
								Interest income	$	(1	)

	Loss Recognized in Income
	on Derivatives
Cash Flow Derivatives Not Designated as Hedging Instruments	Location	Amount
Three months ended September 30, 2011
Foreign exchange contracts	Revenue	$	2,592
Nine months ended September 30, 2011
Foreign exchange contracts	Revenue	$	1,397

The following summarizes the gains (losses) recognized in the condensed consolidated statement of operations and in accumulated other comprehensive income for all derivatives for the three and nine months ended September 30, 2010 (in thousands):

	Loss			Gain Reclassified from			Gain (Loss) on Derivative
	Recognized			Accumulated			Ineffectiveness and
	in OCI on			OCI into Income			Amounts Excluded from
Derivatives in Cash Flow	Derivative			(Effective Portion)			Effectiveness Testing
Hedging Relationships	(Effective Portion)			Location	Amount		Location	Amount
Three months ended September 30, 2010:
Foreign exchange contracts	$	(22,715	)	Revenue	$	2,770	Revenue	$	1,528
							Interest income	$	14
Nine months ended September 30, 2010:
Foreign exchange contracts	$	(20,614	)	Revenue	$	4,753	Revenue	$	1,189
							Interest income	$	(5	)

	Loss
	Recognized in Income
	on Derivative
Cash Flow Derivatives Not Designated as Hedging Instruments	Location	Amount
Three months ended September 30, 2010:
Foreign exchange contracts	Revenue	$	(550	)
Nine months ended September 30, 2010:
Foreign exchange contracts	Revenue	$	(28	)

We estimate that $11.7 million of net losses from derivative instruments included in accumulated other comprehensive loss as of September 30, 2011 will be reclassified into earnings within the next 12 months.