Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments

Derivative Instruments

Note 7 – Derivative Instruments

The Company enters into derivative instruments and hedging activities to manage, where possible and economically efficient, commodity price risk, foreign currency exchange rate risk and interest rate risk related to borrowings. It is the Company's policy to execute such instruments with creditworthy counterparties and not enter into derivative instruments for speculative purposes. All derivatives are reflected on the balance sheet at fair value and recorded in other current assets and other current liabilities in the Unaudited Condensed Consolidated Balance Sheets. The accounting for the fair value of a derivative depends upon whether it has been designated as a hedge and on the type of hedging relationship. Changes in the fair value of derivative instruments are recognized immediately in earnings, unless the derivative is designated as a hedge and qualifies for hedge accounting. Under hedge accounting, recognition of derivative gains and losses can be matched in the same period with that of the hedged exposure and thereby minimize earnings volatility. To qualify for designation in a hedging relationship, specific criteria must be met and appropriate documentation prepared.

For a fair value hedge, the change in fair value of the hedging instrument and the change in fair value of the hedged item attributable to the risk being hedged are both recognized currently in earnings. For a cash flow hedge, the effective portion of the change in fair value of a hedging instrument is initially recognized in Accumulated other comprehensive income (loss) ("AOCI(L)") in stockholders' equity and subsequently reclassified to earnings when the hedged item affects income. The ineffective portion of the change in fair value of a cash flow hedge is recognized immediately in earnings.

Commodity Price Risk

The Company enters into derivative instruments and hedging activities to manage commodity price risk. The Company, from time to time, employs derivative instruments in connection with certain purchases and sales of inventory in order to establish a fixed margin and mitigate the risk of price volatility. Some customers request fixed pricing and the Company may use a derivative to mitigate price risk. The Company makes or receives payments based on the difference between a fixed price (as specified in each individual contract) and the market price of the commodity being hedged. These payments will offset the change in prices of the underlying sales or purchases and effectively fix the price of the hedged commodity at the contracted rate for the contracted volume. While this hedging may limit the Company's ability to participate in gains from favorable commodity price fluctuations, it eliminates the risk of loss from adverse commodity price fluctuations.

Derivative instruments employed by the Company to manage commodity price risk include cash flow and fair value hedges as well as some contracts that are not designated as accounting hedges.

Cash Flow Hedges

From time to time, the Company enters into copper forward sales contracts that are designated as cash flow hedges. The Company had no copper forward sales contracts designated as cash flow hedges at June 30, 2011 or December 31, 2010. No hedge ineffectiveness was recorded in income in the first six months of 2011 or 2010 for these hedges.

Fair Value Hedges

From time to time, the Company enters into certain cobalt forward purchase contracts designated as fair value hedges. The Company had no fair value hedges during the first six months of 2011 or the year ended December 31, 2010.

Foreign Currency Exchange Rate Risk

The functional currency for the Company's Finnish operating subsidiary is the U.S. dollar since a majority of its purchases and sales are denominated in U.S. dollars. Accordingly, foreign currency exchange gains and losses related to transactions of this subsidiary denominated in other currencies (principally the Euro) are included in earnings. While a majority of the subsidiary's raw material purchases are in U.S. dollars, it also has some Euro-denominated expenses. From time to time, the Company enters into foreign currency forward contracts to mitigate a portion of the earnings volatility in those Euro-denominated cash flows due to changes in the Euro/U.S. dollar exchange rate. The Company had no Euro forward contracts at June 30, 2011 or December 31, 2010.

Interest Rate Risk

The Company is exposed to interest rate risk primarily through its borrowing activities. If needed, the Company predominantly utilizes U.S. dollar-denominated borrowings to fund its working capital, acquisition and investment needs. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. From time to time, the Company enters into derivative instruments and hedging activities to manage, where possible and economically efficient, interest rate risk related to borrowings. The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. The Company's interest rate swap agreements and its variable rate financings are predominately based upon the three-month LIBOR. The Company had interest rate swaps with notional values that totaled $30.0 million and $60.0 million at June 30, 2011 and December 31, 2010, respectively. The outstanding contracts as of June 30, 2011 had maturities ranging up to 11 months. As of June 30, 2011, AOCI(L) included a cumulative loss of $0.3 million related to these contracts, all of which is expected to be reclassified to earnings within the next twelve months. No hedge ineffectiveness was recorded in income in the six months ended June 30, 2011 or June 30, 2010 for these hedges.

The following table summarizes the fair value of derivative instruments recorded in the Unaudited Condensed Consolidated Balance Sheets (in thousands):

	Derivatives Designated as Hedging Instruments
	Derivative Assets
	June 30, 2011				December 31, 2010
	Balance sheet location	Fair value			Balance sheet location	Fair value
Commodity contracts	Other current assets	$	—		Other current assets	$	—
Total		$	—			$	—
	Derivative Liabilities
	June 30, 2011				December 31, 2010
	Balance sheet location	Fair value			Balance sheet location	Fair value
Interest rate swap agreements	Other current liabilities		(271	)	Other current liabilities		(393	)
Total		$	(271	)		$	(393	)
	Derivatives Not Designated as Hedging Instruments
	Derivative Liabilities
	June 30, 2011				December 31, 2010
	Balance sheet location	Fair value			Balance sheet location	Fair value
Commodity contracts	Other current liabilities	$	—		Other current liabilities	$	(378	)
Total		$	—			$	(378	)

The following table summarizes the effect of derivative instruments:

Derivatives in Cash Flow Hedging Relationships
	Amount of Gain (Loss) on Derivative Recognized in AOCI(L) (Effective Portion) for the Three Months Ended					Amount of Gain (Loss) on Derivative Recognized in AOCI(L) (Effective Portion) for the Six Months Ended
	June 30, 2011		June 30, 2010			June 30, 2011		June 30, 2010
Euro forward contracts	$	—	$	(2,756	)	$	—	$	(3,926	)
Commodity contracts		96		—			373		(54	)
Interest rate swap agreements		41		(286	)		123		(286	)
Total	$	137	$	(3,042	)	$	496	$	(4,266	)

	Location of Gain (Loss) Reclassified from AOCI(L) into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI(L) into Income  (Effective Portion) for the Three Months Ended						Amount of Gain (Loss) Reclassified from AOCI(L) into Income  (Effective Portion) for the Six Months Ended
		June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Euro forward contracts	Cost of products sold	$	—		$	(979	)	$	—		$	(994	)
Commodity contracts	Net sales		(373	)		—			(373	)		(221	)
Total		$	(373	)	$	(979	)	$	(373	)	$	(1,215	)

Derivatives Not Designated as Hedging Instruments
	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative for the Three Months Ended June 30,				Amount of Gain (Loss) Recognized in Income on Derivative for the Six Months Ended June 30,
		2011		2010		2011			2010
Commodity contracts	Net sales	$	—	$	—	$	(407	)	$	—
Total		$	—	$	—	$	(407	)	$	—