DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES
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Dec. 31, 2012
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DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES | (10) DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES Foreign Currency Exchange Rate Exposure The Company uses forward foreign currency exchange contracts to hedge certain operational exposures resulting from changes in foreign currency exchange rates. Such exposures result from portions of the Company’s forecasted revenues and operating expenses being denominated in currencies other than the U.S. dollar, primarily the Euro and Brazilian Real, respectively. The Company designates certain of these forward foreign currency exchange contracts as hedging instruments and enters into some forward foreign currency exchange contracts that are considered to be economic hedges that are not designated as hedging instruments. Whether designated or undesignated, these forward foreign currency exchange contracts protect against the reduction in value of forecasted foreign currency cash flows resulting from Naglazyme product revenues, Aldurazyme royalty revenues, operating expenses and net asset or liability positions designated in currencies other than the U.S. dollar. The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates, and take into consideration the current creditworthiness of the counterparties or the Company, as applicable. Details of the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations follow below. See Note 12 for additional discussion regarding the fair value of forward foreign currency exchange contracts. At December 31, 2012, the Company had 88 forward foreign currency exchange contracts outstanding to sell a total of 50.6 million Euros and five forward foreign currency exchange contracts outstanding to buy 6.0 million Brazilian Reais with expiration dates ranging from January 2013 through May 2014. These hedges were entered into in order to protect against the fluctuations in revenue associated with Euro denominated Naglazyme, Firdapse and Aldurazyme sales and operating expenses denominated in the Brazilian Real. The Company has formally designated these forward foreign currency exchange contracts as cash flow hedges and expects them to be highly effective within the meaning of FASB ASC Subtopic 815-30, Derivatives and Hedging-Cash Flow Hedges, in offsetting fluctuations in revenues denominated in Euros and operating expenses denominated in the Brazilian Real related to changes in the foreign currency exchange rates. The Company also enters into forward foreign currency exchange contracts that are not designated as hedges for accounting purposes. The changes in fair value of these forward foreign currency exchange contracts are included as a part of Selling, General and Administrative expense in the Consolidated Statements of Operations. At December 31, 2012, separate from the 93 contracts discussed above, the Company had one outstanding forward foreign currency exchange contract to sell 32.4 million Euros that was not designated as a hedge for accounting purposes that matured on January 31, 2013. The maximum length of time over which the Company is hedging its exposure to the reduction in value of forecasted foreign currency cash flows through forward foreign currency exchange contracts is through May 2014. Over the next twelve months, the Company expects to reclassify $0.4 million from accumulated other comprehensive income to earnings as the forecasted revenue transactions and operating expenses occur.
The fair value carrying amounts of the Company’s derivative instruments were as follows:
The effect of the Company’s derivative instruments on the Consolidated Financial Statements for the years ended December 31, 2012, 2011 and 2010 was as follows:
At December 31, 2012, 2011 and 2010, accumulated other comprehensive income before taxes associated with forward foreign currency exchange contracts qualifying for hedge accounting treatment was a loss of $0.2 million, a gain of $8.0 million and a loss of $0.2 million, respectively. The Company is exposed to counterparty credit risk on all of its derivative financial instruments. The Company has established and maintained strict counterparty credit guidelines and enters into hedges only with financial institutions that are investment grade or better to minimize the Company’s exposure to potential defaults. The Company does not require collateral to be pledged under these agreements. |