Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 11—Derivative Instruments and Hedging Activities

Interest Rate Risks

        The Company's exposure to interest rate risk relates primarily to outstanding variable rate debt and adverse movements in the related short-term market rates. The most significant component of the Company's interest rate risk relates to amounts outstanding under the Amended Credit Agreement. In April 2008, the Company entered into an interest rate swap arrangement to manage its exposure to interest rate movements and the related effect on its variable rate debt. Under this interest rate swap arrangement, the Company pays a fixed rate of approximately 3.8% and receives a variable rate based on three month LIBOR. The initial notional amount of this interest rate swap was $90.0 million and it amortizes in proportion to the term debt component of the Amended Credit Agreement through December 2012. At December 31, 2011 and 2010, the notional amount of this interest rate swap was $49.5 million and $66.4 million, respectively. The Company concluded that this swap met the criteria to qualify as an effective hedge of the variability of cash flows of the interest payments and accounts for the interest rate swap as a cash flow hedge. Accordingly, the Company reflects changes in the fair value of the effective portion of this interest rate swap in accumulated other comprehensive income, a separate component of shareholders' equity. Amounts recorded in accumulated other comprehensive income are reclassified to interest and other income (expense), net in the consolidated statement of income when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur.

Foreign Exchange Rate Risk Management

        The Company generates a substantial portion of its revenues and expenses in international markets, principally Germany and other countries in the European Union, Switzerland and Japan, which subjects its operations to the exposure of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. The Company periodically enters into foreign currency contracts in order to minimize the volatility that fluctuations in exchange rates have on its cash flows. Under these arrangements, the Company typically agrees to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates with maturities of less than twelve months. These transactions do not qualify for hedge accounting and, accordingly, the instrument is recorded at fair value with the corresponding gains and losses recorded in the consolidated statements of income. The Company had the following notional amounts outstanding under foreign currency contracts at December 31, (in millions):

Buy	Notional Amount in Buy Currency		Sell	Maturity	Notional Amount in U.S. Dollars		Fair Value of Assets		Fair Value of Liabilities
December 31, 2011:
Euro		1.5	Australian Dollars	January 2012	$	2.1	$	—	$	0.1
Euro		35.0	U.S. Dollars	January 2012 to		48.2		—		2.9
				October 2012
Swiss Francs		24.5	U.S. Dollars	January 2012		27.4		—		1.2
U.S. Dollars		2.5	Mexican Pesos	January 2012 to		2.5		—		—
				November 2012
					$	80.2	$	—	$	4.2
December 31, 2010:
Euro		1.5	Australian Dollars	January 2011	$	2.2	$	—	$	0.2
Euro		13.3	Swiss Francs	January 2011		19.3		—		1.1
Euro		14.5	U.S. Dollars	January 2011 to May 2012		19.6		0.1		0.4
Swiss Francs		13.6	U.S. Dollars	January 2011		13.9		0.7		—
Swiss Francs		18.0	Euro	January 2011		18.5		1.2		—
U.S. Dollars		8.9	Euro	January 2011 to January 2012		8.7		0.1		—
					$	82.2	$	2.1	$	1.7

        In addition, the Company periodically enters into purchase and sales contracts denominated in currencies other than the functional currency of the parties to the transaction. The Company accounts for these transactions separately valuing the "embedded derivative" component of these contracts. The contracts, denominated in currencies other than the functional currency of the transacting parties, amounted to $34.8 million for the delivery of products and $4.9 million for the purchase of products at December 31, 2011 and $16.1 million for the delivery of products and $0.3 million for the purchase of products at December 31, 2010. The changes in the fair value of these embedded derivatives are recorded in interest and other income (expense), net in the consolidated statements of income.

Commodity Price Risk Management

        The Company has an arrangement with a customer under which it has a firm commitment to deliver copper based superconductors at a fixed price. In order to minimize the volatility that fluctuations in the price of copper have on the Company's sales of these commodities, the Company enters into commodity hedge contracts. At December 31, 2011 and 2010, the Company had fixed price commodity contracts with notional amounts aggregating $3.9 million and $2.9 million, respectively. The changes in the fair value of these commodity contracts are recorded in interest and other income (expense), net in the consolidated statements of income.

        The fair value of the derivative instruments described above are recorded in our consolidated balance sheets for the years ending December 31, 2011 and 2010 as follows (in millions):

	Balance Sheet Location	2011		2010
Derivative assets:
Foreign exchange contracts	Other current assets	$	—	$	2.1
Embedded derivatives in purchase and delivery contracts	Other current assets		0.6		0.1
Commodity contracts	Other current assets		0.5		0.6
Derivative liabilities:
Foreign exchange contracts	Other current liabilities	$	4.2	$	1.7
Interest rate swap contract	Other current liabilities		1.1		3.0
Embedded derivatives in purchase and delivery contracts	Other current liabilities		0.4		1.5
Fixed price commodity contracts	Other current liabilities		0.5		0.6

        The losses recognized in other comprehensive income related to the effective portion of the interest rate swap designated as a hedging instrument for the years ending December 31, are as follows (in millions):

	2011			2010			2009
Interest rate swap contract	$	(0.3	)	$	(2.1	)	$	(1.2	)

        The losses related to the effective portion of the interest rate swap designated as a hedging instrument that were reclassified from other comprehensive income and recognized in net income for the years ending December 31, are as follows (in millions):

	2011			2010			2009
Interest rate swap contract	$	(2.2	)	$	(2.6	)	$	(2.5	)

        The Company expects $1.1 million of accumulated losses to be reclassified into earnings over the next twelve months.

        The Company did not recognize any amounts related to ineffectiveness in the results of operations for the years ended December 31, 2011, 2010 and 2009, respectively.

        The impact on net income of unrealized gains and losses resulting from changes in the fair value of derivative instruments not designated as hedging instruments for the years ending December 31, are as follows (in millions):

	2011			2010		2009
Foreign exchange contracts	$	(4.6	)	$	0.4	$	—
Embedded derivatives		1.6			0.1		0.7
Income (expense), net	$	(3.0	)	$	0.5	$	0.7

        The amounts recorded in the results of operations related to derivative instruments not designated as hedging instruments are recorded in interest and other income (expense), net.