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Derivatives And Hedging Activities
 9 Months Ended
Mar. 31, 2012
Derivatives And Hedging Activities [Abstract]  
Derivatives And Hedging Activities

(7) 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 foreign currency 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. While the Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, the Company's foreign exchange policy prohibits the use of speculative transactions.

 

At March 31, 2012, the Company had contracts outstanding with notional amounts of $69.9 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 March 31,     Nine months ended March 31,  
     2012     2011     2012     2011  
     (in thousands)  

Net foreign exchange derivative contract gains (losses)

    $ (1,666 )    $ (2,352 )    $ (2,863 )    $ (2,310 ) 

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

      1,386        1,943        (708 )      1,565   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net foreign currency gains (losses)

    $ (280 )    $ (409 )    $ (3,571 )    $ (745 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the euro versus the British pound, the U.S. dollar versus the euro, U.S. dollar versus the Brazilian real and the U.S. dollar versus other currencies.

For the year-to-date period, the majority of losses were associated with exposures between the U.S. dollar and Brazilian real. In September 2011, the Company incurred a $2.5 million non-recurring loss in conjunction with an unfavorable forward exchange contract to purchase Brazilian reais. In mid-August, the Company decided to pre-fund a portion of the estimated earnout payments associated with the CDC acquisition. This contract was designed to preserve the currency exchange for the few weeks required to transfer the cash to Brazil. From the time the Company entered into the contract through settlement, the real devalued from the contractual rate by 11.8%, ultimately resulting in a $2.5 million loss. Further contributing to the year-to-date foreign exchange loss, the Brazilian business incurred significant losses on U.S. dollar denominated exposures in the first quarter that were not hedged at the time. Subsequently, the Company has been including these exposures in its daily hedging activities.

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 6. 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 and nine months ended March 31, 2012 and 2011, respectively, are as follows:

 

     Quarter ended March 31,     Nine months ended March 31,  
     2012      2011     2012     2011  
     (in thousands)  

Net interest expense recognized as a result of interest rate swap

    $ —         $ 212      $ 216      $ 643   

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

      —           (11 )      (1 )      (110 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

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

      —           201        215        533   

Income tax effect

      —           (74 )      (76 )      (196 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

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

    $ —         $ 127      $ 139      $ 337   
  

 

 

     

 

 

    

 

 

    

 

 

  

 

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 March 31, 2012  
     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

    $ —         $ 2   

Derivative liabilities (b):

      

Foreign exchange contracts

    $ —         $ 277   

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