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Financial Instruments
 3 Months Ended
Mar. 31, 2012
Financial Instruments
11) Financial Instruments

 

ASC 815 “Derivatives and Hedging” requires an entity to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Derivatives that do not qualify as a hedge must be adjusted to fair value in earnings. If a derivative does qualify as a hedge under ASC 815, changes in the fair value will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in other accumulated comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a hedge's change in fair value will be immediately recognized in earnings.

 

Foreign Exchange: The company uses foreign currency forward purchase and sale contracts with terms of less than one year to hedge its exposure to changes in foreign currency exchange rates. The company’s primary hedging activities are to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. The company does not currently enter into derivative financial instruments for speculative purposes. In managing its foreign currency exposures, the company identifies and aggregates naturally occurring offsetting positions and then hedges residual balance sheet exposures. The following table summarizes the forward contracts outstanding at March 31, 2012. The fair value of the forward contracts was a liability of $0.7 million at the end of the first quarter of 2012.

 

Sell Purchase Maturity
12,000,000 British Pounds 14,188,000 Euro Dollars April 5, 2012  
10,000,000 British Pounds 11,823,000 Euro Dollars April 5, 2012  
1,500,000 British Pounds 2,376,000 US Dollars June 29, 2012
4,000,000 Canadian Dollars 4,006,000 US Dollars June 29, 2012
36,500,000 Euro Dollars 48,505,000 US Dollars June 29, 2012
20,000,000 Mexican Pesos 1,549,000 US Dollars June 29, 2012

 

Interest Rate: The company has entered into interest rate swaps to fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income. As of March 31, 2012, the fair value of these instruments was a liability of $3.2 million. The change in fair value of these swap agreements in the first three months of 2012 was a gain of less than $0.1 million, net of taxes.

 

The following tables summarize the company’s fair value of interest rate swaps (in thousands):

 

     Condensed Consolidated            
    Balance Sheet Presentation   Mar 31, 2012     Dec 31, 2011  
Fair value   Other non-current liabilities   $ (3,161 )   $ (3,216 )

 

The impact on earnings from interest rate swaps was as follows (in thousands):

 

        Three Months Ended  
    Presentation of Gain/(loss)   Mar 31, 2012     Apr 2, 2011  
                 
Gain/(loss) recognized in accumulated other comprehensive income   Other comprehensive income   $ (451 )   $ (634 )
                     
Gain/(loss) reclassified from accumulated other comprehensive income (effective portion)   Interest expense   $ (507 )   $ (790 )
                     
Gain/(loss) recognized in income (ineffective portion)   Other expense   $ (1 )   $ 40  

 

Interest rate swaps are subject to default risk to the extent the counterparties are unable to satisfy their settlement obligations under the interest rate swap agreements. The company reviews the credit profile of the financial institutions and assesses its creditworthiness prior to entering into the interest rate swap agreements. The interest rate swap agreements typically contain provisions that allow the counterparty to require early settlement in the event that the company becomes insolvent or is unable to maintain compliance with its covenants under its existing debt agreements.