Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

9.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 will pay a fixed rate of approximately 3.8% and receive 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 September 30, 2011 and December 31, 2010, the notional amount of this interest rate swap was $54.0 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, as such, 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 statements of income when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company expects $1.5 million of accumulated losses to be reclassified into earnings over the next twelve months.

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. 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 September 30, 2011 and December 31, 2010 (in millions):

Buy	Notional Amount in Buy Currency	Sell	Maturity	Notional Amount in U.S. Dollars		Fair Value of Assets		Fair Value of Liabilities
September 30, 2011:
Euro	1.5	Australian Dollars	December 2011	$	2.2	$	—	$	—
Euro	3.5	U.S. Dollars	October 2011 to September 2012	4.6		0.1		0.1
				$	6.8	$	0.1	$	0.1
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 delivery 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 $17.5 million for the delivery of products and $4.2 million for the purchase of products at September 30, 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 the Company 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 superconductors, the Company enters into commodity hedge contracts. At September 30, 2011 and December 31, 2010, the Company had fixed price commodity contracts with notional amounts aggregating $5.4 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 at September 30, 2011 and December 31, 2010 are recorded in our consolidated balance sheets as follows (in millions):

		September 30,		December 31,
	Balance Sheet Location	2011		2010
Derivative assets:
Foreign exchange contracts	Other current assets	$	0.1	$	2.1
Embedded derivatives in purchase and delivery contracts	Other current assets	0.1		0.1
Commodity contracts	Other current assets	1.0		0.6
Derivative liabilities:
Interest rate swap contract	Other current liabilities	$	1.7	$	3.0
Foreign exchange contracts	Other current liabilities	0.1		1.7
Embedded derivatives in purchase and delivery contracts	Other current liabilities	0.2		1.5
Fixed price commodity contracts	Other current liabilities	1.0		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 three and nine months ended September 30, 2011 and 2010 are as follows (in millions):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011			2010
Interest rate swap contract	$	—	$	(0.7	)	$	(0.3	)	$	(2.2	)

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 three and nine months ended September 30, 2011 and 2010 are as follows (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Interest rate swap contract	$	(0.6	)	$	(0.6	)	$	(1.6	)	$	(2.0	)

The Company did not recognize any amounts related to ineffectiveness in the results of operations for the three and nine months ended September 30, 2011 and 2010.

The impact on net income of changes in the fair value of derivative instruments not designated as hedging instruments for the three and nine months ended September 30, 2011 and 2010 are as follows (in millions):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Foreign exchange contracts	$	(0.2	)	$	1.3	$	(0.4	)	$	—
Embedded derivatives	0.8			0.5		1.3			(1.8		)
Income (expense), net	$	0.6		$	1.8	$	0.9		$	(1.8	)

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.