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NOTE 8. DERIVATIVE INSTRUMENTS & FAIR VALUE
The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, notes payable to bank, and variable interest rate debt approximate their fair values either due to the short period to maturity of the instruments or due to the nature of underlying assets or liabilities.
Derivative Instruments
We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on monetary assets and liabilities denominated in currencies other than the applicable functional currency as well as on forecasted transactions denominated in currencies other than the applicable functional currency. These contracts are considered derivative instruments and are recorded as either assets or liabilities which are measured at fair value using internal models based on observable market inputs such as spot and forward rates. For contracts that are designated and qualify as cash flow hedges, the unrealized gains or losses on the contracts are reported as a component of other comprehensive income (“OCI”) and are reclassified from accumulated other comprehensive income (“AOCI”) into earnings on the consolidated statement of operations when the hedged transaction affects earnings. As of June 30, 2011, the net impact of existing gains or losses expected to be reclassified from AOCI into earnings in the next 12 months is not material. For contracts that are not designated as hedges, the gains and losses on the contract are recognized in current earnings as other (income) expense.
Notional amounts of the derivative financial instruments not qualifying or designated as hedges were $36.0 million at June 30, 2011 and $20.0 million at December 31, 2010. Gains and (losses) related to those derivative financial instruments were $0.2 million and $(0.2) million, respectively, for the three and six months ended June 30, 2011. Gains and (losses) related to those derivative financial instruments were $(0.2) million and $(0.3) million, respectively, for the three and six months ended June 30, 2010. The gains and losses were recorded in our consolidated statement of operations.
Derivative financial instruments qualifying and designated as hedges are as follows:
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
|
|
Notional
Amount |
|
Unrealized
Gain (Loss) |
|
Notional
Amount |
|
Unrealized
Gain (Loss) |
|
|
|
|
(in thousands) |
|
|
Foreign currency forwards |
|
$ |
37,446 |
|
$ |
238 |
|
$ |
2,161 |
|
$ |
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
The following table presents the fair values and classification of our financial instruments measured on a recurring basis:
|
|
|
As of June 30, 2011 |
|
|
|
|
Classification |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
(in thousands) |
|
|
Foreign currency forwards designated as hedges |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ 147 |
|
$ - |
|
$ 147 |
|
$ - |
|
|
|
|
Accrued expenses |
|
$ 385 |
|
$ - |
|
$ 385 |
|
$ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards not designated as hedges |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ 185 |
|
$ - |
|
$ 185 |
|
$ - |
|
|
|
|
Accrued expenses |
|
$ 244 |
|
$ - |
|
$ 244 |
|
$ - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
Classification |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
(in thousands) |
|
|
Foreign currency forwards designated as hedges |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ - |
|
$ - |
|
$ - |
|
$ - |
|
|
|
|
Accrued expenses |
|
$ 90 |
|
$ - |
|
$ 90 |
|
$ - |
|
|
Foreign currency forwards not designated as hedges |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ 254 |
|
$ - |
|
$ 254 |
|
$ - |
|
|
|
|
Accrued expenses |
|
$ 16 |
|
$ - |
|
$ 16 |
|
$ - | |