Derivative Instruments And Hedging

3 Months Ended

Mar. 31, 2012

Derivative Instruments And Hedging [Abstract]

Derivative Instruments And Hedging

Note 16. Derivative Instruments and Hedging

Disclosure within this footnote is presented to provide transparency about how and why we use derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations and cash flows.

We are exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using derivative instruments are foreign currency exchange risk and interest rate risk. Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into foreign currency exchange contracts to minimize the impact of foreign currency fluctuations associated with specific, significant transactions. We enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with our variable-rate debt.

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with large multinational financial institutions and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management.

We recognize all derivative instruments, including our foreign currency exchange contracts and interest rate swap agreements, on the balance sheet at fair value at the balance sheet date. Derivative instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. If a derivative instrument does qualify for hedge accounting, depending on the nature of the hedging instrument, changes in the fair value of derivative instrument are either recognized in earnings or deferred in other comprehensive income ("OCI"), net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To qualify for hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. We immediately record in earnings the extent to which a hedge instrument is not effective in achieving offsetting changes in fair value. We de-designate derivative instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in OCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We enter into master netting arrangements with the counterparties to our derivative transactions which permit outstanding receivables and payables with the counterparties to our derivative transactions to be offset in the event of default. We present our derivative assets and liabilities on a gross basis. All cash flows related to our foreign currency exchange contracts and interest rate swaps are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged.

Cash Flow Hedges

We have designated our foreign currency exchange contracts and variable-to-fixed interest rate swaps as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange and interest rates. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.

We did not de-designate any instruments from hedge accounting treatment during the three months ended March 31, 2012 or 2011. Gains or losses related to hedge ineffectiveness recognized in earnings during the three months ended March 31, 2012 and 2011 were not material. At March 31, 2012, the estimated amount of net gains that are expected to be reclassified out of accumulated OCI and into earnings within the next 12 months is $1.5 million if exchange and interest rates do not fluctuate from the levels at March 31, 2012.

We enter into foreign currency exchange contracts for amounts that are less than the full value of forecasted intercompany inventory purchases and sales. Our hedging strategy related to intercompany inventory purchases and sales is to employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that year, which is complete by the end of the preceding year. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, the notional value of foreign currency exchange contracts outstanding may be higher throughout the year in comparison to the amounts outstanding at the end of the year. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle.

We have entered into forward fixed interest rate swap agreements to manage the economic effect of variable interest obligations on amounts borrowed under the terms of our Credit Facility. Beginning on March 30, 2012, the variable interest rate associated with $40 million of borrowings outstanding under the Credit Facility became effectively fixed at 1.36% plus the range of applicable interest rates ("Credit Spread") through June 30, 2016. Beginning on March 28, 2013, the variable interest rate associated with an additional $40 million of borrowings outstanding under the Credit Facility will become effectively fixed at 1.64% plus the Credit Spread through June 30, 2016. Also on March 30, 2012, two of our forward fixed interest rate swap agreements expired. Under these agreements, the variable interest rate associated with $80 million of borrowings outstanding under the Credit Facility had been effectively fixed at 2% plus the Credit Spread above the London interbank rate.

The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales consisted of the following (in thousands):

Currency Sold	U.S. Dollar Equivalent
	March 31,		December 31,
	2012		2011
Euro	$	64,802	$	68,275
British pound		23,398		25,260
Canadian dollar		19,202		19,902
Australian dollar		11,927		12,417
Japanese yen		16,546		18,005
	$	135,875	$	143,859

Currency Purchased	U.S. Dollar Equivalent
	March 31,		December 31,
	2012		2011
Swiss franc	$	16,102	$	17,909

The notional amount of forward fixed interest rate swap agreements to manage variable interest obligations consisted of the following (in thousands):

	U.S. Dollar Equivalent
	March 31,		December 31,
	2012		2011
Interest rate swaps commencing March 31, 2010 and expiring March 30, 2012	$	-	$	80,000
Interest rate swap commencing March 30, 2012 and expiring June 30, 2016	$	40,000	$	40,000
Interest rate swap commencing March 28, 2013 and expiring June 30, 2016	$	40,000	$	40,000

The fair values of derivative instruments and their respective classification in the condensed consolidated balance sheet consisted of the following (in thousands):

		Asset Derivatives
		March 31, 2012		December 31, 2011
Derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Other current assets	$	3,887	$	6,841
Foreign currency exchange contracts	Other long-term assets, net		193		-
		$	4,080	$	6,841

		Liability Derivatives
		March 31, 2012		December 31, 2011
Derivatives designated as hedging instruments	Balance Sheet Classification
Foreign currency exchange contracts	Accrued expenses	$	925	$	1,753
Foreign currency exchange contracts	Other long-term liabilities		156		-
Interest rate swaps	Accrued expenses		1,242		1,417
Total derivative instruments		$	2,323	$	3,170

The effect of derivative instruments designated as cash flow hedges on the condensed consolidated balance sheet for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

	Gain (Loss) Recognized in OCI on Derivative Instruments (Effective Portion)
Derivative instruments	For the Three Months Ended March 31,
	2012			2011
Foreign currency exchange contracts, net of tax	$	(1,811	)	$	(2,252	)
Interest rate swaps, net of tax		110			176
Total, net of tax	$	(1,701	)	$	(2,076	)

The effect of derivative instruments designated as cash flow hedges on the condensed consolidated statement of operations for the three months ended March 31, 2012 and 2011 consisted of the following (in thousands):

		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivative instruments	Classification of Gain (Loss) Reclassified from OCI into Income (Effective Portion)	For the Three Months Ended March 31,
		2012			2011
Foreign currency exchange contracts	Cost of revenue	$	1,486		$	(1,291	)
Interest rate swaps	Interest expense		(350	)		(341	)
		$	1,136		$	(1,632	)