Derivative Instruments and Hedging Strategies

9 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Strategies [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES

I. DERIVATIVE INSTRUMENTS AND HEDGING STRATEGIES

We operate in various countries and have operations in the United Kingdom and Canada. These international operations expose us to market risk associated with foreign currency exchange rate fluctuations. We have entered into certain forward contracts to hedge the risk of certain foreign currency rate fluctuations. To the extent we choose to manage volatility associated with the net exposures, we enter into various financial transactions which we account for using the applicable accounting guidance for derivative instruments and hedging activities. Our objective is to hedge the variability in forecasted cash flow due to the foreign currency risk associated with certain long-term contracts. As of June 30, 2011, we held only derivatives that were designated as cash flow hedges related to the U.S. Dollar/British Pound Sterling exchange rate and the Euro/British Pound Sterling exchange rate.

All derivatives are recognized on the Condensed Consolidated Balance Sheet at their fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives as of June 30, 2011 was approximately $0.8 million.

The following table presents the fair value of derivative instruments included within the Condensed Consolidated Balance Sheets as of June 30, 2011:

	Asset Derivatives			Liability Derivatives
		Fair			Fair
	Balance Sheet Location	Value		Balance Sheet Location	Value
	(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange forwards	Prepaid expenses and other current assets	$	—	Other accrued expenses	$	32
Total derivatives		$	—		$	32

The following table presents the fair value of derivative instruments included within the Condensed Consolidated Balances Sheets as of September 30, 2010:

	Asset Derivatives			Liability Derivatives
		Fair			Fair
	Balance Sheet Location	Value		Balance Sheet Location	Value
	(in thousands)
Derivatives designated as hedging instruments:
Foreign exchange forwards	Prepaid expenses and other current assets	$	—	Other accrued expenses	$	47
Total derivatives		$	—		$	47

The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2011:

								Amount of Gain (Loss)
	Amount of Gain (Loss)							Reclassified from
	Recognized in Other							Accumulated Other
	Comprehensive Income on							Comprehensive Income
	Derivatives							into Income
	Three Months			Nine Months			Location of Gain (Loss)	Three Months		Nine Months
	Ended			Ended			Reclassified from Accumulated	Ended		Ended
	June 30,			June 30,			Other comprehensive Income	June 30,		June 30,
Derivatives designated:	2011			2011			into Income	2011		2011
	(in thousands)							(in thousands)
Derivatives designated as cash flow hedges:
Foreign exchange forwards	$	(14	)	$	(19	)	Revenues	$	3	$	45
Total designated cash flow hedges	$	(14	)	$	(19	)		$	3	$	45

The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2010:

							Amount of Gain (Loss)
	Amount of Gain (Loss)						Reclassified from
	Recognized in Other						Accumulated Other
	Comprehensive Income on						Comprehensive Income
	Derivatives1						into Income1
	Three Months			Nine Months		Location of Gain (Loss)	Three Months		Nine Months
	Ended			Ended		Reclassified from Accumulated	Ended		Ended
	June 30,			June 30,		Other comprehensive Income	June 30,		June 30,
Derivatives designated:	2010			2010		into Income	2010		2010
	(in thousands)						(in thousands)
Derivatives designated as cash flow hedges:
Foreign exchange forwards	$	(10	)	$	761	Revenues	$	32	$	(154	)
Total designated cash flow hedges	$	(10	)	$	761		$	32	$	(154	)

¹ For the three and nine month periods ended June 30, 2010, we recorded in revenues an immaterial amount of ineffectiveness from cash flow hedges.

Refer to Note B for a description of how the above financial instruments are valued in accordance with the fair value measurement accounting guidance for the three and nine month periods ended June 30, 2011.

     Cash Flow Hedges

The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual cash flows resulting from transactions that are denominated in currencies other than the U.S. Dollar will be adversely affected by changes in exchange rates. We are currently hedging our exposure to the reduction in value of forecasted foreign currency cash flows through foreign currency forward agreements through September 30, 2011, for transactions denominated in the British Pound Sterling.

All changes in the fair value of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in accumulated other comprehensive income, until net income is affected by the variability of cash flows of the hedged transaction, or until it is probable that the forecasted transaction will not occur. In most cases, amounts recorded in accumulated other comprehensive income will be released to net income some time after the maturity of the related derivative. The Condensed Consolidated Statements of Operations’ classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of revenue and product costs are recorded in revenue and costs of sales, respectively, when the underlying hedged transaction affects net income. Results of hedges of selling and administrative expense, if any, are recorded together with those costs when the related expense is recorded. In addition, any ineffective portion of the changes in the fair value of the derivatives designated as cash flow hedges are reported in the Condensed Consolidated Statements of Operations as the changes occur.

As of June 30, 2011, approximately $29,900 of deferred net losses (net of tax) on outstanding derivatives recorded in accumulated other comprehensive income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on the exchange rates in effect when the derivative contracts that are currently outstanding mature. As of June 30, 2011, the maximum term over which we are hedging exposure to the variability of cash flows for our forecasted and recorded transactions is three months. For the three and nine months ended June 30, 2011, we recorded in selling, general and administrative expense an immaterial amount of ineffectiveness from cash flow hedges.

     Credit Risk

We are exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The ability of financial counterparties to perform under financial instruments has become less certain. We attempt to take into account the financial viability of counterparties in both valuing the instruments and determining their effectiveness as hedging instruments. If a counterparty was unable to perform, our ability to qualify for hedging certain transactions would be compromised and the realizable value of the financial instruments would be uncertain. As a result, our results of operations and cash flows would be impacted.