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Derivatives And Hedging Activities
3 Months Ended
Sep. 30, 2011
Derivatives And Hedging Activities 
Derivatives And Hedging Activities

(8) Derivatives and Hedging Activities

The Company's results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. These risks and the management of these risks are discussed in greater detail below. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with generally accepted accounting principles in the United States. The Company records all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.

Foreign Currency — The Company conducts a portion of its business internationally in a variety of foreign currencies. The exposure to market risk for changes in foreign currency exchange rates arises from foreign currency denominated assets and liabilities, and transactions arising from non-functional currency financing or trading activities. The Company's objective is to preserve the economic value of non-functional currency denominated cash flows. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible, and once these opportunities have been exhausted, through short term forward contracts or other hedging instruments with third parties. These contracts will periodically hedge the exchange of various currencies, including the U.S. dollar, euro, British pound, Canadian dollar, Mexican peso and Brazilian real. At September 30, 2011, the Company had contracts outstanding with notional amounts of $76.7 million to exchange foreign currencies. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures are as follows:

 

     Quarter ended September 30,  
     2011     2010  
     (in thousands)  

Net foreign exchange derivative contract gains (losses)

    $ (1,212 )    $ (1,468 ) 

Net foreign currency transactional and re-measurement gains (losses)

      (2,361 )      1,079   
  

 

 

    

 

 

  

Net foreign currency transactional and re-measurement gains (losses)

    $ (3,573 )    $ (389 ) 
  

 

 

    

 

 

  

 

Interest Rates — The Company's earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure to interest rates, the Company may enter into interest rate swap hedges. In January 2008, the Company entered into an interest rate swap agreement to hedge the variability in future cash flows of interest payments related to the $25 million promissory note payable discussed in Note 7. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flow, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). The swap expired on September 28, 2011. From the inception of the swap through expiration, there was not any ineffectiveness associated with the instrument. Currently, there are no other swap agreements outstanding.

The components of the cash flow hedge included in accumulated other comprehensive income, net of income taxes, in the condensed consolidated balance sheets for the quarters ended September 30, 2011 and 2010, respectively, are as follows:

 

     Quarter ended September 30,  
     2011     2010  
     (in thousands)  

Net interest expense recognized as a result of interest rate swap

    $ 216      $ 214   

Unrealized gain (loss) in fair value of interest swap rates

      (1 )      (95 ) 
  

 

 

    

 

 

  

Net increase (decrease) in accumulated other comprehensive income (loss)

      215        119   

Income tax effect

      (76 )      (45 ) 
  

 

 

    

 

 

  

Net increase (decrease) in accumulated other comprehensive income (loss), net of tax

    $ 139      $ 74   
  

 

 

    

 

 

  

The Company has the following derivative instruments located on the condensed consolidated balance sheets and income statements, utilized for the risk management purposes detailed above:

 

     As of September 30, 2011  
     Fair Value  of
Derivatives
Designated as Hedge
Instruments		      Fair Value  of
Derivatives
Not Designated as Hedge
Instruments		  
     (in thousands)  

Derivative assets (a):

      

Foreign exchange contracts

    $ —         $ 140   

Derivative liabilities (b):

      

Foreign exchange contracts

    $ —         $ (28 ) 

a) All derivative assets are recorded as prepaid expense and other assets in the condensed consolidated balance sheets.
b) All derivative liabilities are recorded as accrued expenses and other liabilities in the condensed consolidated balance sheets.