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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2012
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities
4. Derivative Instruments and Hedging Activities

The Company conducts business in various foreign countries, and, from time to time, settles transactions in foreign currencies. The Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. These derivative contracts are consistent with the Company’s strategy for financial risk management. The Company uses cash flow hedge accounting treatment for qualifying foreign currency forward contracts. The Company initially reports any gain or loss on the effective portion of a cash flow hedge as a component of other comprehensive income and subsequently reclassifies any gain or loss to net sales when the hedged revenues are recorded. Instruments that do not qualify for cash flow hedge accounting treatment are re-measured at fair value on each balance sheet date and resulting gains and losses are recognized in net income. As of September 30, 2012 and December 31,

2011, the total notional amount of the derivative contracts not designated as hedges was $1.9 million (CAD$1.8 million) and $1.5 million (CAD$1.5 million), respectively. As of September 30, 2012 and December 31, 2011, the total notional amount of the derivative contracts designated as hedges was $14.2 million (CAD$14.0 million) and $8.5 million (CAD$8.6 million), respectively.

For each derivative contract for which the Company seeks to obtain cash flow hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative contracts that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of these hedged items is reflected in other comprehensive income. If it is determined that a derivative contract is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative contract prospectively.

All of the Company’s Canadian forward contracts have maturities not longer than 12 months at September 30, 2012, except one contract with a notional value of $4.8 million (CAD$4.7 million) which has a remaining maturity of 18 months.

The balance sheet location and the fair values of derivative instruments are (in thousands):

 

                 
    September 30,     December 31,  
Foreign Currency Forward Contracts   2012     2011  

Assets

                

Derivatives designated as hedging instruments

                

Prepaid expenses and other

   $ —       $ 66  

Derivatives not designated as hedging instruments

                

Prepaid expenses and other

     —         87  
   

 

 

    

 

 

  

Total assets

   $ —       $ 153  
   

 

 

    

 

 

  

Liabilities

                

Derivatives designated as hedging instruments

                

Accrued liabilities

   $ 428     $ 23  

Derivatives not designated as hedging instruments

                

Accrued liabilities

     213       85  
   

 

 

    

 

 

  

Total liabilities

   $ 641     $ 108  
   

 

 

    

 

 

  

 

The amounts of the gains and losses related to the Company’s derivative contracts designated as hedging instruments for the three and nine months ended September 30, 2012 and September 30, 2011 are (in thousands):

 

                                         
          Pretax Gain (Loss) Recognized in Comprehensive Income on  Effective Portion of Derivative  
          Three months ended     Nine months ended  
          September 30,     September 30,  
          2012     2011     2012     2011  

Derivatives in Cash Flow Hedging

                                        

Relationships

                                        

Foreign currency forward contracts

           $ (300 )    $ 357     $ (352 )    $ 4  
           

 

 

    

 

 

    

 

 

    

 

 

  
     
          Pretax Loss Recognized in Income on Effective Portion of Derivative as a Result
of Reclassification from
Accumulated Other Comprehensive Loss		  
          Three months ended     Nine months ended  
          September 30,     September 30,  
    Location     2012     2011     2012     2011  

Derivatives in Cash Flow Hedging

                                        

Relationships

                                        

Foreign currency forward contracts

     Net sales     $ (27 )    $ (52 )    $ (19 )    $ (558 ) 
           

 

 

    

 

 

    

 

 

    

 

 

  
     
          Loss on Ineffective Portion of Derivative and Amount
Excluded from Effectiveness Testing Recognized in Income		  
          Three months ended     Nine months ended  
          September 30,     September 30,  
    Location     2012     2011     2012     2011  

Derivatives in Cash Flow Hedging

                                        

Relationships

                                        

Foreign currency forward contracts

     Net sales     $ (44 )    $ (15 )    $ (138 )    $ (72 ) 
           

 

 

    

 

 

    

 

 

    

 

 

  

At September 30, 2012, there is $0.3 million of unrealized pretax loss on outstanding derivatives accumulated in other comprehensive loss, the majority of which is expected to be reclassified to net sales within the next 12 months as a result of underlying hedged transactions also being recorded in net sales.

For the three and nine months ended September 30, 2012, the gains and losses from our derivative contracts not designated as hedging instruments recognized in net sales were a loss of $0.3 million and a loss of $0.4 million, respectively. For the three and nine months ended September 30, 2011, gains from our derivative contracts not designated as hedging instruments recognized in net sales were $0.9 million and $0.3 million, respectively.