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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2011
Derivative Financial Instruments
(5) Derivative Financial Instruments

 

The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in other comprehensive income are reclassified to current-period earnings. Cash-flow hedges were highly effective, in all material respects.

 

The following table presents gains and losses in derivatives designated as hedges and the location of those gains and losses in the financial statements (in thousands):

 

                Location of Gain    
                (Loss)   Amount of Gain
    Amount of Gain   Location of Gain   Amount of Gain   Recognized in   (Loss) Recognized
Derivatives in   (Loss) Recognized   (Loss) Reclassified   (Loss) Reclassified   Income on   in Income on
Cash Flow   in OCI on   from Accumulated   from Accumulated   Derivative   Derivative
Hedging   Derivative   OCI into Income   OCI into Income   (Effective   (Effective Portion)
Relationships   (Effective Portion)   (Effective Portion)   (Effective Portion)   Portion)   (A)
    Year ended       Year ended       Year ended
    December 31,       December 31,       December 31,
      2011     2010         2011     2010         2011     2010  
Foreign exchange               Gain (loss) on               Gain (loss) on              
contracts   $ —     —   foreign currency   $ —     —   foreign currency   $  —     (2,638 )

 

(A) The amount of gain (loss) recognized in income represents the amount excluded from the assessment of hedge effectiveness.

 

The following table presents gains and losses in derivatives not designated as hedges and the location of those gains and losses in the financial statements (in thousands):

 

 

Derivatives not   Location of Gain (Loss)                
Designated as Hedging   recognized in Income on     December 31,       December 31,  
Instruments   Derivative     2011       2010  
                     
Interest rate swaps   Interest expense   $ 272     $ 362  
Foreign exchange contracts   Gain (loss) on foreign currency   $ (108 )   $ (86 )

 

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts not accounted for using hedge accounting in 2011 resulted in a liability and is included in accrued expenses and in 2010 such valuation resulted in an asset and is included in other current assets on the accompanying balance sheets. Generally, increases or decreases in the fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative instrument is designated and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument will be recorded as a separate component of shareholders’ equity.

 

At December 31, 2011, the Company had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $67.3 million and GB £10.0 million which all have maturities of less than one year.