Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities

7. Derivative Instruments and Hedging Activities

The Company occasionally utilizes derivative instruments to reduce its exposure to the effects of the variability of foreign currencies on its financial performance when it believes such action is warranted. The Company does not engage in derivative instruments for speculative purposes. Lydall has historically not been a party to a significant number of derivative instruments.

The Company had no derivative instruments at December 31, 2011 or 2010 designated as cash flow or fair value hedging instruments. The Company did not have derivative instruments during 2011 and the effect of derivative instruments on the Consolidated Statement of Operations designated as cash flow or fair value hedging instruments was immaterial for 2010.

In December 2008, the Company entered into a foreign currency forward contract with a notional amount of €4.5 million that matured in December 2010. This derivative instrument was accounted for as an economic hedge of an intercompany loan denominated in a foreign currency. At each balance sheet date throughout the term of this derivative instrument, the Company remeasured it at fair value and recognized the change in fair value in the statement of operations. The Company entered into this derivative contract to minimize the offsetting impact in the Company’s statement of operations of changes in foreign currency rates impacting the amount of an intercompany loan that was settled in December 2010.

The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations in the years ended December 31, 2011 and December 31, 2010 were as follows:

In thousands	Location of (loss) recognized in earnings	Loss Recognized in Earnings
		2011		2010
Foreign exchange contracts	Other income, net	$	-	$	(630	)

The Company includes the gain or loss on the derivative in the same line item as the offsetting gain or loss on the related hedged item. The amounts noted in the tables above for other income, net do not include any adjustments for the impact of deferred income taxes.