DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2012

DERIVATIVE INSTRUMENTS

4. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable, cash and intercompany payables. The U.S. operating company invoices most of its foreign customers in foreign currencies, which results in cash and receivables held at the end of the reporting period denominated in these foreign currencies. Since the U.S. operating company’s functional currency is the U.S. dollar, the Company recognizes a foreign currency transaction gain or (loss) on the foreign currency denominated cash, intercompany payables and accounts receivable held by the U.S. operating company in its consolidated statements of operations when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company is primarily exposed to changes in the value of the Euro and British pound relative to the U.S. dollar. The foreign currency forward contracts utilized by the Company are not designated as hedging instruments and as a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other (expense) income, net, in its consolidated statement of operations. However, the fluctuations in the value of these foreign currency forward contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms not greater than 90 days.

During 2012, the Company entered into and settled foreign currency forward contracts to sell €49.7 million and £52 million and receive in exchange $145.4 million. During 2011, the Company entered into and settled foreign currency forward contracts to sell €28.5 million and £19.5 million and receive in exchange $71.4 million. As of December 31, 2012 and December 31, 2011, the Company did not have any foreign currency forward contracts outstanding. During 2012, the change in the fair value of the Company’s foreign currency forward contracts recorded in other (expense) income, net, was a loss of $1.7 million. During 2011, the change in the fair value of the Company’s foreign currency forward contracts recorded in other (expense) income, net, was a gain $0.8 million.