Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2012

Derivatives and Hedging Activities [Abstract]

Derivatives and Hedging Activities

(7)  Derivatives and Hedging Activities

The Company operates internationally and is exposed to fluctuations in foreign exchange rates and interest rates in the normal course of business.  The Company considers the use of derivative financial instruments to reduce exposure to market risks resulting from fluctuations in interest rates and foreign exchange rates.

All financial instruments involve market and credit risks.  The Company is exposed to credit losses in the event of non-performance by the counterparties to the contracts.  While there can be no assurance, the Company does not anticipate non-performance by these counterparties.

Foreign Currency Forward Contracts

The Company enters into forward exchange contracts to hedge forecasted cash flows associated with foreign currency transaction exposures, as deemed appropriate.  This hedging strategy mitigates some of the impact of short-term foreign exchange rate movements on the Company's operating results primarily in Sweden and Italy. The Company's primary market risk relates to exposures to foreign currency exchange rate fluctuations on transactions entered into by these international operations that are denominated primarily in U.S. dollars, Swedish krona and euros.

The Company's forward exchange contracts substantially offset gains and losses on the transactions being hedged.  The forward exchange contracts have varying maturities with none exceeding twelve months.

All forward contracts outstanding at March 31, 2012 have been designated as cash flow hedges and, accordingly, changes in the fair value of these derivatives are not included in earnings but are included in accumulated other comprehensive income/(loss) ("AOCI").  Changes in the fair value of the derivative instruments reported in AOCI will be recorded into earnings as a component of product revenue or expense, as applicable, when the forecasted transaction occurs.  The ineffective portion of all hedges is recognized in current-period earnings and is immaterial to the Company's financial results.

The notional amounts of foreign exchange forward contracts were $4,169 and $11,005 at March 31, 2012 and December 31, 2011, respectively.

Included in AOCI is the fair value of the Company's forward exchange contracts which is a gain of $142 and $380 as of March 31, 2012 and December 31, 2011, respectively.  These gains are located under the caption "Prepaid expenses and other current assets" on the balance sheet as of March 31, 2012 and December 31, 2011.  Assuming current market conditions continue, the entire amount recorded in AOCI related to foreign exchange forward contracts is expected to be recorded into other revenue within the next 12 months to reflect the fixed prices obtained from the forward contracts.

The Company recorded a pre-tax unrealized loss in OCI from foreign exchange contracts of $189 for the three months ended March 31, 2012.  The Company also reclassified a pre-tax gain for the settlement of forward contracts of $49 into other revenue for the three months ended March 31, 2012.

Interest Rate Swap Agreement

The Company entered into an interest rate swap agreement in March 2012 to reduce the impact of changes in interest rates on its floating rate debt.  The swap agreement is a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional debt amount.

The swap contract outstanding at March 31, 2012 has been designated a cash flow hedge and, accordingly, changes in the fair value of this derivative are not recorded in earnings but are recorded each period in AOCI, and reclassified into earnings as interest expense in the same period during which the hedged transaction affects earnings.  The ineffective portion of all hedges will be recognized in current-period earnings and has been immaterial to the Company's financial results.

As of March 31, 2012, the Company had an interest rate swap in place with a notional value of $60,000, at a fixed rate of 0.92%, maturing in September 2015.  The Company's strategy has been to cover a portion of its outstanding floating rate debt with fixed interest rate protection.  At March 31, 2012 the Company had floating rate debt of $84,000, of which $60,000 is fixed by an interest rate swap.  Interest expense under this agreement, and the respective debt instrument that it hedges, is recorded at the net effective interest rate of the hedged transaction.  The fair value of this agreement is based on quoted market prices and was in a loss position of $380 at March 31, 2012.  This loss is reflected in the Company's balance sheet under the caption "Accrued expenses and other current liabilities."  The Company did not have any interest rate swaps outstanding at December 31, 2011.

The Company recorded a loss in OCI of $380 related to the interest rate swap for the three months ended March 31, 2012.  Assuming current market conditions continue, $373 is expected to be reclassed out of AOCI within the next 12 months.