Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2012

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 March 31, 2012 and December 31, 2011, the notional amount of this interest rate swap was $45.0 million and $49.5 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 condensed consolidated statement of income and comprehensive 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 and comprehensive income. The Company had the following notional amounts outstanding under foreign currency contracts (in millions):

Buy	Notional Amount in Buy  Currency	Sell	Maturity	Notional Amount in U.S. Dollars		Fair Value of Assets		Fair Value of Liabilities
March 31, 2012:
Euro	2.2	Australian Dollars	April 2012 to November 2012	$	3.0	$	—	$	0.1
Euro	32.3	U.S. Dollars	April 2012 to October 2012	41.4		1.8		—
Japanese Yen	25.0	Euro	April 2012 to July 2012	0.3		—		—
Swiss Francs	32.2	U.S. Dollars	April 2012	34.1		1.5		—
U.S. Dollars	9.4	Euro	April 2012	9.5		—		0.1
U.S. Dollars	1.2	Mexican Pesos	April 2012 to November 2012	1.4		—		0.1
				$	89.7	$	3.3	$	0.3
December 31, 2011:
Euro	1.5	Australian Dollars	January 2012	$	2.1	$	—	$	0.1
Euro	35.0	U.S. Dollars	January 2012 to October 2012	48.2		—		2.9
Swiss Francs	24.5	U.S. Dollars	January 2012	27.4		—		1.2
U.S. Dollars	2.5	Mexican Pesos	January 2012 to November 2012	2.5		—		—
				$	80.2	$	—	$	4.2

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 $46.5 million for the delivery of products and $5.6 million for the purchase of products at March 31, 2012 and $34.8 million for the delivery of products and $4.9 million for the purchase of products at December 31, 2011. The changes in the fair value of these embedded derivatives are recorded as foreign currency exchange gains/losses in interest and other income (expense), net in the condensed consolidated statements of income and comprehensive 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 superconductors, the Company enters into commodity hedge contracts. At March 31, 2012 and December 31, 2011, the Company had fixed price commodity contracts with notional amounts aggregating $4.6 million and $3.9 million, respectively. The changes in the fair value of these commodity contracts are recorded as foreign exchange gains/losses in interest and other income (expense), net in the condensed consolidated statements of income and comprehensive income.

The fair value of the derivative instruments described above are recorded in the consolidated balance sheets for the periods as follows (in millions):

		March 31,		December 31,
	Balance Sheet Location	2012		2011
Derivative assets:
Foreign exchange contracts	Other current assets	$	3.3	$	—
Embedded derivatives in purchase and delivery contracts	Other current assets	0.3		0.6
Commodity contracts	Other current assets	0.1		0.5
Derivative liabilities:
Interest rate swap contract	Other current liabilities	$	0.9	$	1.1
Foreign exchange contracts	Other current liabilities	0.3		4.2
Embedded derivatives in purchase and delivery contracts	Other current liabilities	0.5		0.4
Fixed price commodity contracts	Other current liabilities	0.1		0.5

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

	Three Months Ended March 31,
	2012			2011
Interest rate swap contract	$	(0.2	)	$	(0.1	)

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 are as follows (in millions):

	Three Months Ended March 31,
	2012			2011
Interest rate swap contract	$	(0.4	)	$	(0.5	)

The Company expects $0.9 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 three months ended March 31, 2012 and 2011.

The impact on net income of changes in the fair value of derivative instruments not designated as hedging instruments are as follows (in millions):

	Three Months Ended March 31,
	2012			2011
Foreign exchange contracts	$	7.2		$	(0.1	)
Embedded derivatives	(0.5		)	0.7
Income (expense), net	$	6.7		$	0.6

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 in the condensed consolidated statements of income and comprehensive income.