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Derivative Instruments
 12 Months Ended
Dec. 31, 2012
Derivative Instruments

NOTE 11: 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. These 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 net foreign currency losses of $880,000 in 2012, $504,000 in 2011, and $328,000 in 2010.

As of December 31, 2012, the Company had outstanding forward contracts to exchange Euros for $3,590,000. As of December 31, 2012, the intercompany receivable denominated in Japanese Yen was not significant, and therefore management did not have outstanding forward contracts related to this exposure. The Company did however enter into these forward contracts throughout the year, with total gains and losses on these contracts reflected in current operations. The Company may utilize forward contracts to hedge intercompany balances in the future at the discretion of management. In addition, during the third quarter of 2012, the Company entered into forward contracts to exchange Euros for U.S. Dollars at fixed exchange rates to protect against a potential devaluation of the Euro as it was converting a large amount of Euro-denominated cash into U.S. Dollars. The settlement of these forward contracts resulted in a foreign currency loss of $504,000 recorded in the third quarter of 2012.

Information regarding the fair value of the forward contracts outstanding as of December 31, 2012 and December 31, 2011 were as follows (in thousands):

 

     Asset Derivatives      Liability Derivatives  
        Fair Value             Fair Value  
      Balance
Sheet
Location		    December 31,
2012		      December 31,
2011		      Balance
Sheet
Location		      December 31,
2012		      December 31,
2011		  

Currency forward contracts

    Prepaid
expenses
and
other
current
assets		    $ 44       $ 14        
 		 Accrued
expenses		   
  		    $ 14       $ 165   

Information regarding the effect of the forward contracts, net of the underlying exposures, on the Consolidated Statements of Operations for each of the periods presented were as follows (in thousands):

 

     Location of
Gain  (Loss)
Recognized
in Income on
Derivatives		  

Amount of Gain (Loss) Recognized

In Income on Derivatives
Year ended December 31,

  
     2012     2011      2010  

Currency forward contracts

    Foreign currency

gain (loss)

   $ (722 )    $ 34       $ 62