Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2013

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. The Company currently has a higher level of fixed rate debt, which limits the exposure to adverse movements in interest rates.

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 foreign currency denominated transactions.  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, using forward exchange contracts. 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 condensed 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, 2013:
Euro	0.8	Australian Dollars	May 2013 to October 2013	$	1.0	$	—	$	0.1
Euro	54.3	U.S. Dollars	April 2013 to January 2014	72.4		—		2.8
Swiss Francs	24.0	U.S. Dollars	April 2013	25.9		—		0.6
U.S. Dollars	0.5	Euro	April 2013	0.5		—		—
U.S. Dollars	0.8	Mexican Pesos	May 2013	0.8		—		—
				$	100.6	$	—	$	3.5
December 31, 2012:
Euro	1.2	Australian Dollars	January 2013 to April 2013	$	1.6	$	—	$	—
Euro	49.3	U.S. Dollars	January 2013 to October 2013	64.0		1.2		—
Swiss Francs	26.1	U.S. Dollars	January 2013	27.9		0.6		—
U.S. Dollars	0.8	Mexican Pesos	January 2013	0.8		—		—
				$	94.3	$	1.8	$	—

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 $37.3 million for the delivery of products and $7.9 million for the purchase of products at March 31, 2013 and $40.2 million for the delivery of products and $10.3 million for the purchase of products at December 31, 2012. 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, 2013 and December 31, 2012, the Company had fixed price commodity contracts with notional amounts aggregating $2.4 million and $3.4 million, respectively. The changes in the fair value of these commodity contracts are recorded 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 is recorded in the consolidated balance sheets for the periods as follows (in millions):

		March 31,		December 31,
	Balance Sheet Location	2013		2012
Derivative assets:
Foreign exchange contracts	Other current assets	$	—	$	1.8
Embedded derivatives in purchase and delivery contracts	Other current assets	0.8		0.3
Derivative liabilities:
Foreign exchange contracts	Other current liabilities	$	3.5	$	—
Embedded derivatives in purchase and delivery contracts	Other current liabilities	0.1		0.3
Fixed price commodity contracts	Other current liabilities	0.2		0.2

During the three months ended March 31, 2012, the Company recognized $0.2 million of losses in other comprehensive income and reclassified $0.4 million of losses from other comprehensive income and recognized into net income related to the effective portion of an interest rate swap designated as a hedging instrument that matured as of December 31, 2012. The Company did not recognize any amounts related to ineffectiveness on an interest rate swap in the results of operations for the three months ended March 31, 2012.

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,
	2013			2012
Foreign exchange contracts	$	(5.3	)	$	7.2
Embedded derivatives	0.7			(0.5		)
Income (expense), net	$	(4.6	)	$	6.7

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 in the condensed consolidated statements of income and comprehensive income.