Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments

NOTE 10: Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. The Company currently mitigates certain foreign currency exchange rate risks with derivative instruments. The Company does not currently manage its interest rate risk with derivative instruments.

The Company faces exposure to foreign currency exchange rate fluctuations, as a significant portion of its revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of the Company’s subsidiaries or the reporting currency of the Company, which is the U.S. Dollar. The Company faces two types of foreign currency exchange rate exposures:

• transactional currency/functional currency exchange rate exposures from transactions that are denominated in currencies other than the functional currency of the subsidiary (for example, a U.S. Dollar receivable on the Company’s Irish subsidiary’s books for which the functional currency is the Euro), and

• functional currency/reporting currency exchange rate exposures from transactions that are denominated in currencies other than the U.S. Dollar, which is the reporting currency of the Company.

The Company uses derivative instruments to provide an economic hedge against its transactional currency/functional currency exchange rate exposures. Forward contracts on currencies are entered into to manage the transactional currency/functional currency exposure of the Company’s Irish subsidiary’s accounts receivable denominated in U.S. dollars and intercompany receivables denominated in Japanese Yen. In addition, beginning in the first quarter of 2013, forward contracts on currencies are entered into to manage the transactional currency/functional currency exposure at the Company’s Surface Inspection Systems Division (SISD), where accounts receivable may be denominated in Euros and Japanese Yen, but the functional currency is the U.S. Dollar. All of the Company’s forward contracts are used to minimize foreign currency gains or losses, as the gains or losses on these contracts are intended to offset the losses or gains on the underlying exposures.

These forward contracts do not qualify for hedge accounting. Both the underlying exposures and the forward contracts are recorded at fair value on the Consolidated Balance Sheets and changes in fair value are reported as “Foreign currency gain (loss)” on the Consolidated Statements of Operations. The Company recorded a net foreign currency gain of $63,000 in the quarter ended March 31, 2013, and a loss of $638,000 in the quarter ended April 1, 2012.

As of March 31, 2013, the Company had the following outstanding forward contracts that were entered into to mitigate foreign currency exchange rate risk:

Currency	Amount
Japanese Yen/Euro	170,000,000 Japanese Yen
Japanese Yen/U.S. Dollar	116,000,000 Japanese Yen
U.S. Dollar/Euro	2,580,000 U.S. Dollars
Euro/U.S. Dollar	775,000 Euros

Information regarding the fair value of the forward contracts outstanding as of March 31, 2013 and December 31, 2012 was as follows (in thousands):

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	March 31, 2013		December 31, 2012		Balance Sheet Location	March 31, 2013		December 31, 2012
Currency forward contracts	Prepaid expenses and other current assets	$	1	$	44	Accrued expenses	$	83	$	14

Information regarding the effect of the forward contracts, net of the underlying exposure, on the Consolidated Statements of Operations for the quarters ended March 31, 2013 and April 1, 2012 were as follows (in thousands):

	Location of  Loss Recognized in Income on Derivatives	Amount of Loss  Recognized in Income on Derivatives
		Quarter ended
		March 31, 2013		April 1, 2012
Currency forward contracts	Foreign currency loss	$	203	$	289