Note 6 - Financial Risk Management and Derivatives

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Text Block]

6.             Financial Risk Management and Derivatives

Sales denominated in currencies other than the U.S. dollar, which are primarily sales to customers in Europe, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency.  The Company’s primary risk exposures are from changes in the rates between the U.S. dollar and the Euro and between the Euro and the Pound Sterling.  In 2012 and 2011, the Company entered into forward foreign exchange contracts to exchange Euros for U.S. dollars and Pound Sterling for Euros.  The extent to which forward foreign exchange contracts are used is modified periodically in response to management’s estimate of market conditions and the terms and length of specific sales contracts.

The Company enters into forward foreign exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation.  The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual net cash inflow resulting from the sale of products to foreign customers will be materially affected by changes in exchange rates.  The Company does not hold or issue financial instruments for trading purposes.  The forward foreign exchange contracts are designated for firmly committed or forecasted sales.  These contracts settle in less than one year.

The forward foreign exchange contracts generally require the Company to exchange Euros for U.S. dollars or Pound Sterling for Euros at maturity, at rates agreed upon at the inception of the contracts.  The Company’s counterparties to derivative transactions are major financial institutions with an investment grade or better credit rating; however, the Company is exposed to credit risk with these institutions.  The credit risk is limited to the unrealized gains in such contracts should these counterparties fail to perform as contracted.

At September 30, 2012, forward foreign exchange contracts with a notional value of $27,802,000 were outstanding to exchange various currencies with maturities ranging from October 2012 to June 2013, to sell the equivalent of approximately $4,002,000 in foreign currencies at contracted rates and to buy approximately $23,800,000 in foreign currencies at contracted rates.  These contracts have been designated as cash flow hedges.  Cash flows from these forward foreign exchange contracts are classified in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows.  At September 30, 2012, the Company did not have any forward foreign exchange contracts that do not qualify as hedges.

The fair value of the Company’s derivatives on its Consolidated Balance Sheets were as follows (in thousands):

	Asset Derivatives					Liability Derivatives
	Balance Sheet	September 30, 2012		December 31, 2011		Balance Sheet	September 30, 2012		December 31, 2011
	Location	Fair Value		Fair Value		Location	Fair Value		Fair Value
Derivatives Designated as Hedging Instruments
Foreign exchange contracts	Prepaid expenses and other current assets	$	211	$	1,321	Accrued liabilities	$	525	$	306

The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the nine months ended September 30, 2012 and 2011 were as follows (in thousands):

Derivatives in	Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings (“OCE”) on Derivative (Effective Portion)					Location of Gain/(Loss) Reclassified from OCE	Amount of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)						Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow Hedging	Nine Months Ended September 30,					into Income (Effective	Nine Months Ended September 30,						Excluded from Effectiveness	Nine Months Ended September 30,
Relationships	2012			2011		Portion)	2012			2011			Testing)	2012			2011
Foreign exchange contracts	$	(537	)	$	61	Cost of goods sold	$	(150	)	$	(78	)	Selling, general and administrative expenses	$	(55	)	$	(20	)

The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the three months ended September 30, 2012 and 2011 were as follows (in thousands):

Derivatives in	Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings (“OCE”) on Derivative (Effective Portion)					Location of Gain/(Loss) Reclassified from OCE	Amount of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)				Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow Hedging	Three Months Ended September 30,					into Income (Effective	Three Months Ended September 30,				Excluded from Effectiveness	Three Months Ended September 30,
Relationships	2012			2011		Portion)	2012		2011		Testing)	2012			2011
Foreign exchange contracts	$	(832	)	$	840	Cost of goods sold	$	387	$	46	Selling, general and administrative expenses	$	(107	)	$	5